What is the relationship between consumer spending and interest rates?

The relationship between consumer spending and interest rates is rooted in the mechanisms of borrowing and saving. When interest rates rise, the cost of borrowing increases. This typically discourages consumers from taking out loans for large purchases, such as homes or cars, because higher interest rates mean higher monthly payments, making those purchases less affordable. Additionally, higher rates can encourage consumers to save rather than spend, as they can earn more on their savings. Consequently, with decreased access to credit and greater incentives to save, overall consumer spending typically declines when interest rates rise.

On the other hand, lower interest rates generally make borrowing cheaper, enticing consumers to finance new purchases with loans or credit. This results in higher consumer spending as households take advantage of reduced financing costs. Therefore, it is clear that higher interest rates typically lead to a decrease in consumer spending, aligning with the understanding of economic behavior concerning consumer finance in relation to interest rates.