Finance While Highly Inflated Countries Essay

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The difference in the interest rates would have predicted a much greater change in the exchange rates between these two countries. This begs the question as to why the rates did not change further.

There are a few possible explanations for this discrepancy. The first is that the expected inflation in Brazil failed to material, and the second is that inflation in the U.S. was higher than expected. U.S. inflation is not high, but it is growing, whereas interest rates are not growing yet. In contrast, the Brazilian government's response to its inflation situation is more in line with what would be expected.

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The real has underperformed expectations, and there could also be domestic factors. If we look at the six factors that affect exchange rates, we can see that there may be issues with respect to public debt (if Brazil has performed worse than expected) or political stability and performance. If these factors have come into play, the expectation for future interest rate changes might have deviated significantly from the expectations of a year ago.

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