How does a central bank's decision to lower interest rates typically affect inflation in the economy?

When a central bank lowers interest rates, it makes borrowing money cheaper for individuals and businesses. This encourages people to take out loans to buy homes, cars, or invest in their businesses, which increases spending in the economy. As more money is spent, demand for goods and services rises, leading to higher prices, which is known as inflation. For example, if a small business borrows money at a lower rate to expand, it might hire more employees and pay them more, contributing to overall price increases in the local economy. Therefore, lowering interest rates can stimulate economic activity but also lead to rising inflation as demand grows.