Question

If the inflation rate is 2.5% and the real rate you need to achieve is 4.5%, your needs for investment returns are what? Should increasing money supply growth place place upward or downward pressure on I rates? Why do forecast of I rates differ among experts?

Answer 1

HI,

Here inflation rate = 2.5%

real rate = 4.5%

so we will use fisher effect to find investment return (nominal return)

fisher effect says

1+nominal return = (1+real rate)*(1+ inflation)

1+nominal rate = (1+2.5%)*(1+4.5%)

1+nominal rate = 1.025*1.045

nominal rate = 7.11%

So your needs for investment return is 7.11%

Increasing money supply put downward pressure on interest rates at first. But as money supply increases, But if inflation expectation occurs because of money supply then funds for loan will increase and that will inflate interest rates,

Interest rate forecast is a subjective term and depends on various factors. and changes in these factors will change interest rate forecast. Experts thinking of these factors movements may vary and hence there forecast for interest rate movement also vary with that.

Thanks