If market considers that Mexico expected inflation rate next year is 3% higher than expected US...
If market considers that Mexico expected inflation rate next year is 3% higher than expected US inflation rate what would be the impact on relative interest rates in the two countries? Is it going to impact the interest rates now or next year?
Homework Answers
Since now it will not be profitable to make an investment in Mexico. thus investors would look for such destinations where inflation would be low.
Hence, here investment will flow towards the US where the inflation rate is low. Thus, now the interest rate in the US will decrease, while the interest rate in Mexico will witness an increase. In other words, the interest rate in Mexico will rise relatively.
It would impact the interest rate now and its impacts would be predominant over the next year as well.
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