How do rising interest rates generally impact consumer spending?

Rising interest rates generally lead to an increase in the cost of borrowing. When interest rates rise, consumers face higher costs on loans, such as mortgages, car loans, and credit cards. This can discourage borrowing and spending since the cost of servicing debt becomes more expensive. Additionally, higher interest rates may lower disposable income as individuals allocate more of their budgets toward paying interest rather than spending on goods and services.

As a result, consumers might decide to reduce discretionary spending, leading to a decrease in overall consumer spending. This trend can have broader implications for economic growth, as consumer spending is a significant component of GDP. The interaction between higher interest rates and reduced consumer confidence also plays a role; uncertainty about economic conditions can further dampen spending as households become more cautious with their finances.