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There isn't a simple functional causal relationship between interest rates, inflation and currency rates. And in fact, I think you have it exactly backwards in
by derriz 2y ago
There isn't a simple functional causal relationship between interest rates, inflation and currency rates.
And in fact, I think you have it exactly backwards in this case.
Many countries have dollarized their economies - replacing a local currency supported by high interest rates with the US dollar which has even lower interest rate than EUR - as a tool to tame inflation or kill hyper-inflation. Other - small non-EU countries have adopted the Euro for the same reason.
And with the same result - a massive fall in inflation.
This isn't just theory, this has been observed to work over and over again.
- gargan 2y agoSorry but you have it backwards. The examples you have in mind are South American and Eastern European countries 20 years ago ie emerging markets struggling to maintain a currency peg. Iceland doesn't suffer from hyperinflation and it's already got an established central bank and trusted institutions. Lowering the interest rate in this environment would 100% lead to more inflation. Plus Iceland relies on currency devaluation to cope with shocks. It would be crazy to give this up.