Can i kindly ask 2 questions?
I. On reading 16, capital market expectations, under 4.1 business cycle analysis, it’s stated that “short term interest rates drop during recessions”. However, on Exhibit 15, it’s stated that “inflation peaks in a recession”. Do these not contradict? If inflation peaks, the central bank has to raise the rates to keep up with the inflation to prop up the currency, otherwise the currency would collapse. When the official interest rates rise, short term rates would rise, wouldn’t it?
Since i have lived in an emerging market, my thinking might be different. The text might be written for developed markets.
II. Exhibit 18 says “favorableness of cash holdings is positive when inflation is above expectations- bias toward rising rates”, which didn’t make sense.
Thank you in advance
KR.
