How do interest rates typically affect investment decisions?

Higher interest rates typically make borrowing more expensive, which can lead to a reduction in investment. When interest rates rise, the cost of loans increases, impacting both consumers and businesses. For businesses, higher borrowing costs can deter them from financing new projects or expanding operations, as the resulting higher interest payments can eat into their profits. Similarly, consumers may choose to delay or avoid big purchases, such as homes or cars, that often require financing.

This relationship is supported by economic theory, which indicates that higher interest rates result in less available cash flow for spending and investment, leading to a slowdown in economic activity. Therefore, when interest rates increase, the expectation is that investments will be curtailed as the cost of funding those investments rises.