Interest rates

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By adjusting interest rates, a central bank
can control the supply of its currency, directly
affecting its value. If interest rates are increased,
it becomes more expensive to borrow and
more attractive to save, causing the amount
Interest rates
of money in circulation to shrink as people
store more money in the banks. The money
supply is thereby reduced, and as lower supply
causes higher prices, the domestic currency
strengthens. Conversely, if interest rates are
cut, borrowing from banks becomes cheaper
and saving becomes less attractive, causing
the supply of money in free circulation to
increase, resulting in a weaker currency.