What economic policy usually involves raising interest rates to slow inflation by reducing borrowing and spending?

Contractionary monetary policy usually involves raising interest rates to slow inflation by reducing borrowing and spending.

A central bank can tighten monetary conditions by increasing policy interest rates, selling securities, or raising reserve requirements. Higher borrowing costs can reduce demand for mortgages, business investment, and consumer credit, easing pressure on prices.

This policy works with a delay and can weaken economic growth. If tightening is excessive or arrives after a shock, it may contribute to higher unemployment or recession. Central banks therefore balance inflation risks against employment and financial-stability concerns.

Contractionary monetary policy is different from fiscal policy, which concerns government taxation and spending. It also does not directly set most retail prices; instead, it influences economy-wide demand and financial conditions.