Why zero interest rates might lead to currency volatility

Why zero interest rates might lead to currency volatility

Expert Solution

Zero interest rate will be reflective of a situation where the central bank is trying to stimulate the economy by providing all the required support by cutting down the interest rates to the levels of 0, and Central Bank will not be having more flexibility in order to support the economy because it will then to put the interest rate into the negative zones and hence it will be having a negative impact as well as uncertainty in respect to the currency because when the interest rates are lower, the currency strength are always lower so when the interest rate will be lowering, the overall volatility in the domestic currency in respect to the foreign currency will be increasing because there will be a high degree of uncertainty due to prevailing macro conditions which are not that good at cutting down of the interest rate is another factor which is adversely affecting the overall currency rate, so domestic currency rate will be mostly depreciating in respect of the foreign currency and it will be remaining volatile due to presence of high uncertainty in the Macro environment.

jeff jeffy answered 2 years ago

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