The President of the European Central Bank, Mario Draghi, has outlined his intentions to increase the ECB's base interest rate from its historic low of 0% - Leaving Cert Economics - Question b - 2019

As the interest rate increases, the cost of borrowing will also rise. Individuals and businesses looking to take loans for personal or capital purposes will face higher repayments. For homeowners, increased mortgage payments can strain household budgets, potentially reducing disposable income and consumer spending.

While higher interest rates may benefit savers, they can lead to reduced consumption as people choose to save more for the future. This shift can dampen consumer spending, which is a significant driver of economic growth, thereby negatively impacting businesses that rely on consumer expenditure.

With consumers spending less and businesses hesitant to invest due to higher borrowing costs, overall economic activity may slow. A decline in investment can affect job creation and reduce demand for goods and services in the economy, leading to a potential downturn.

As businesses cut back on investment and face reduced consumer demand, the risk of rising unemployment increases. This situation is concerning, as fewer jobs can lead to less disposable income in the economy, further curtailing spending and growth.

If interest rates rise, borrowers may struggle to meet higher repayment obligations, leading to an increased risk of defaults. This could trigger a wave of personal bankruptcies, which not only impacts the individuals involved but can also destabilize the financial system and reduce lending capacity among banks.