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When inflation is high, the central bank is supposed to raise the interest rate. But when...

When inflation is high, the central bank is supposed to raise the interest rate. But when China raises its interest rate, inflation may get worse. Why?

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This was the case for the fixed exchange rate policy in the Chinese economy. An increase in the rate of interest was expected to attract global capital and this resulted in appreciating the Chinese currency. Now that exchange rate was fixed, the central bank had to intervene and increase the money supply (to depreciate the currency) which would result in raising the inflation rate. This implies that countries with fixed exchange rate experiences the rate of inflation getting even higher if they deliberately raise the rate of interest.

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