What do interest rates tell us about the state of an economy? I seem to have a misconception about what interest rates mean. On one hand, they signal how high a government's demand for money is, because if a government is ever in any serious need of money, they can sell bonds with a high enough coupon rate to ensure that investors will quickly buy them, which will have the knock on effect of raising interest rates. On the other hand, I hear that government will frequently increase/decrease interest rates in order to discourage/encourage consumer spending (although, frankly, I've got no idea how the governments go about changing these rates).

So, put bluntly, what do interest rates actually mean? If we take for example the UK, I've never heard anyone claim that the interest rates are low because the government is in no real need of money, but I have frequently heard that the interest rates are low because the government wants to encourage consumer spending. What should be read in to that?
What do interest rates tell us about the state of an economy?


Very little. That is because interest rates are a mechanism aimed at influencing one of many variables of an economy, rather than to diagnose it/them. Interest rates are a one-dimensional dimensional parameter, whereas the state of an economy cannot be captured with just one number. 

For instance, an economy might be analyzed from the standpoint of its GDP, its Gini coefficient, income per capita, inflation, an agent's (or sector's) purchase power parity, and other aspects which are not comparable to each other. A rate simply cannot describe all these aspects.

Your question itself reflects how interest rates are used for purposes which are not necessarily --or not always-- related: to aid governmental budget, and to influence consumption. In some situations, a cash-strapped government might wish for a reduced consumption (for instance, to be able to cope with public demand), whereas in other situations it might wish for greater consumption (to increase its tax revenues). The fact that two variables in an economy don't always go -or are not intended to go- in the same direction illustrates the ambiguity of how to interpret interest rates.

It should be added that interest rates are also a mechanism aimed at procuring currency stability. This goal can be at odds with patching a budget so that the government can fulfill its agenda. Hence the importance, at least among those of us with a neoliberal mindset, of keeping government and central bank separate; that is, to ensure that the latter is an autonomous entity.