Interest rate trend vs inflation

Question

This case states under diagram 3:

Since the government is trying to control inflation, Interest rates are expected to decline in the next few years.

Is this a typo? Isn't it the case that interest rates rise as inflation increases?

If so, this would make checking accounts more attractive as we can lend money at higher rates and then pay depositors the same rate as before to pocket the difference?

Answer 1

Dear,

I agree that the statement might be misleading. From a general standpoint, the common macro-economic relationship is higher interest rates → decreased spending → lower inflation rate.

However, I think the confusion is caused by the verb “control” only. Considering the context of the case, I believe the government has all the intentions to foster the economy and encourage overall spending of people by borrowing more money from the banks. This can be supported by lowering interest rates. Hence, the government is “controlling” inflation in the sense that it's trying to increase spending by lowering interest rates. This is in line with what is reported in the case.

Hope this helps - feel free to ping me to discuss this further.

Best,

Antonio

Answer 2

Hi there!

If interest rates are down >>> inflation goes up. And the other way around.

The prompt is indeed rather convoluted.

In a real case scenario, make sure that you clarify these questions with the interviewer. You'd already win ‘points' by just showing that you're trying to get clarity over the client's situation and their objectives.

Best,
Cristian

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