How interest rates affect the exchange rate ?

The interest rates are the tools of monetary policy enables central banks to manage inflation, which may prove to be harmful to term.

Concretely, when in a country, the inflation becomes too high, the central bank increases the interest rate to compensate for this dysfunction. The increase in the interest rate will then have an impact on credit institutions which will, in turn, increase their rate of credit and savings. The households will then be encouraged to put their money in these establishments in order to consume to a lesser extent for the moment and better in the future thanks to these investments. Logically, the decrease in consumption will lead to lower demand and then lower prices. In the end, by increasing its interest rates, the central bank has solved its inflation problem.

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