Interest rates are one of the most important economic indicators, as they affect the cost of capital, the availability of credit, and the overall level of economic activity. But what causes interest rates to rise? To answer this question, we need to understand the basic mechanics of how interest rates work.

At its most basic level, the interest rate is the cost of borrowing money. When the demand for money increases, the cost of borrowing money (the interest rate) goes up. This is because lenders are more selective with their lending decisions, and they charge higher interest rates to compensate for the greater risk of lending.

In addition to demand, another factor that affects the cost of borrowing is the supply of money. If there is an abundance of money in the market, lenders are more likely to offer lower interest rates to attract borrowers. Conversely, if there is a shortage of money in the market, lenders are more likely to offer higher interest rates to make sure they can cover the cost of lending.

Government policies and central banks can also influence interest rates. Central banks use monetary policy to influence the supply of money in the economy, which in turn affects the cost of borrowing. For example, if a central bank decides to raise interest rates, it will make borrowing more expensive and thus discourage borrowing.

Finally, inflation plays a role in determining interest rates. When inflation is high, lenders will charge higher interest rates to compensate for the erosion of the principal amount they are lending. On the other hand, if inflation is low, lenders may be more willing to offer lower interest rates.

The cost of borrowing money is determined by a number of factors, including the demand for money, the supply of money, government policies, and inflation. When these factors push the cost of borrowing money up, interest rates will rise.