Verified answer

Inflation means that the price of goods is going up. If you buy a house, it goes up. You wouldn't invest in a bank savings account that pays 3% interest when a house is going up 10% each year. The house is the better investment. Not because a house is better than cash. It isn't. It is because of the inflation. So Bank of Canada is forced to raise the interest it pays to 6% to compete. It doesn't have to match the 10% of the house. A house has taxes that must be paid and insurance that must be paid. The bank knows that and adjusts accordingly.

Central Banks usually try to keep the interest rate above the inflation rate. Which means that higher inflation rate encourages the Bank of Canada to raise the interest rate.

But sometimes central banks lower the interest rate below the inflation rate in order to devalue excessive debts in the economy. When many people borrow so much money that they can't possibly pay it back. Then these people either have to default on their debts. Or the government can devalue the money through inflation and make those debts easier to pay off.