HOW HAVE INTEREST RATE AFFECT INFLATION AND THE UKS EXCHANGE RATES WITH OTHER Currency. please?
If interest rates are below the inflation rate, people will tend to do the sensible thing and borrow cheap money to buy assets. This is what has been happening over the last few years and has caused the inflationary bubble in house prices. Usually interest rates are slightly above the inflation rate so that there is a small ‘real return’ on safe investments like government bonds. But if the country wants to dampen down inflation, the best way to do this is to increase interest rates sharply which will cause a fall in spending (demand) as there is now a strong incentive to save, the opposite of what happens when interest rates are below inflation. With regard to other countries, investors are always looking for a better return on their money. If they get a higher interest rate in dollar denominated instruments than in sterling, that is where they will put their money. However, they need to factor in the inflation rate too as this will affect what they will receive back when they sell th
