Interest rates generally rise and fall in response to changes in the cash rate made by the Reserve Bank of Australia (the ‘RBA’). The RBA changes the cash rate in order to try and keep the inflation rate within an acceptable band (somewhere between 2% and 3% per annum).
Inflation is when the prices of goods and services in the economy are increasing. A low inflation rate is a healthy sign for an economy -- it means demand is strong and company profits are growing.
However, if the economy gets overheated, wage growth may be unable to keep up with inflation, which could ultimately push more of the population into poverty. In order to curb inflation, the RBA will increase the cash rate, driving up interest rates and decreasing demand.
Once the economy cools and inflation is back under control, the RBA will lower the cash rate, which will restimulate the economy.