Reducing interest rates encourages consumers to borrow more money. Here's why:
1. **Lower Cost of Borrowing**: When interest rates are reduced, the cost of borrowing money decreases. This makes it more attractive for consumers to take out loans, whether it's for buying a house, a car, or other big-ticket items.
2. **Stimulating Spending**: Lower interest rates can stimulate consumer spending. When borrowing is cheaper, consumers may be more inclined to make purchases they might have delayed otherwise. This increased spending can boost economic activity.
3. **Impact on Savings**: On the other hand, lower interest rates can also reduce the returns on savings accounts. This could discourage saving money in traditional savings accounts, leading some individuals to seek higher returns through investments or spending rather than saving.
In summary, by reducing interest rates, central banks aim to encourage borrowing and spending in the economy to stimulate economic growth.
