In hoping to restrain economic growth, interest rates were raised by British policymakers, making it more expensive to borrow for businesses and consumers.
A. In hoping to restrain economic growth, interest rates were raised by British policymakers, making it more expensive to borrow for businesses and consumers.
B. Making it more expensive for businesses and consumers to borrow, interest rates were raised by British policymakers, in hopes of their restraining economic growth.
C. In making borrowing for businesses and consumers more expensive, British policymakers, in hopes they will restrain economic growth, had raised interest rates.
D. Hopefully restraining economic growth, British policymakers raised interest rates, making more expensive borrowing by businesses and consumers.
E. Hoping to restrain economic growth, British policymakers raised interest rates, making it more expensive for businesses and consumers to borrow

This is GMATPREP question. In the correct option "E", what "making it more expensive for business...." is modifying?

that's what's called a participial modifier: it uses a present participle ('making') after a comma.

such modifiers are adverbial modifiers; as such, they modify the action of the entire preceding clause. if you want to pin down a specific word that they modify, you'd point to the verb of the preceding clause ('raised'); however, adverbial phrases don't need to appear next to the item they modify, so there's no point in such precise fingering.

Why other choices are wrong? Also in the OA what "it" is referring to "making it....". If it is referring to interest rates, then is interest rates not a plural and it a singular?

the 'it' is an idiomatic construction. it's the same 'it' that you'll see in the following:
it is impossible for adult learners to speak most languages without an accent.
i'm not sure of the grammatical term for this construction, if there is any, but you should know that such constructions exist.

choice a:
- needless use of passive voice
- modifier indicates that interest rates were hoping to restrain economic growth
- 'borrow for businesses and consumers' = some unmentioned agent is borrowing for the benefit of businesses and consumers (not what is meant)

choice b:
- needless use of passive voice
- ambiguous 'their'

choice c:
- two 'ing's in a row = undesirable
- improper mix of future and past tenses
- needless use of past perfect
- wording that is just awful (not sure whether you have a sense of this - depends on your degree of exposure to well-written english)

choice d:
- present participle ('restraining') improperly signals ongoing CURRENT action (whereas the actual meaning is a hoped-for future result)
- 'making more expensive borrowing' = awkward construction (the natural english wording would be 'making borrowing more expensive', but even that is bad because it has two 'ing's in a row)

Dear Ron
how do u know that

choice d:
- present participle ('restraining') improperly signals ongoing CURRENT action

that's the purpose of using a participial modifier ('restraining...') to open a clause like the one here.

analogy:
hoping to thwart widespread counterfeiting, the country's government recalled all of the existing currency and replaced it with new bills. --> notice that 'hoping' is CURRENT, in terms of the action described in the sentence