What is the passage mainly explaining?

How a central bank steers spending by changing the price of borrowing, and why that is hard (Paragraph two gives the mechanism, paragraph three gives the difficulty, paragraph four gives the consequence for how bankers speak.)

According to the passage, what do households do when the central bank raises its rate?

They postpone purchases. (The chain states it: "Households postpone purchases, and firms delay building the new factory.")

Why must a central bank act on a forecast rather than on what it can see?

Because its decisions affect the economy only after a long delay (The passage says effects arrive "often a year or more after the decision", so today's choice must be aimed at a future economy.)

As used in this passage, a "recession" is

a period when the economy shrinks and people lose jobs (The word appears where cooling goes too far: "the cooling turns into a recession, with real unemployment attached to it.")

The Price Of Borrowing: Level 4 Reading Comprehension Questions

An interest rate is a price: what borrowed money costs for a year. Most prices are settled by the people trading, but in a modern economy a central bank has strong influence over the short-term rate, and it uses that influence deliberately.

The chain runs roughly like this. When the central bank raises its rate, banks pay more for funds and charge more for loans. Home loans, business credit, and car finance all grow expensive. Households postpone purchases, and firms delay building the new factory. Spending slows across the economy, and with it the upward pressure on prices. Lowering the rate reverses the chain and encourages borrowing.

The difficulty is timing. The effects arrive slowly, often a year or more after the decision, so the bank must act on a forecast of an economy it cannot yet see. Move too late and inflation settles in. Move too hard and the cooling turns into a recession, with real unemployment attached to it.

This is why the language of central bankers is so careful. Expectations move markets by themselves, and a single unguarded sentence can do the work of a rate change before the rate has changed at all.

Comprehension questions