In the long run, the arbitrage activity ends and the profits are recovered, that is, the high-interest currency turns back to the low-interest currency, which leads to an increase in the demand for low-interest currency, an increase in the supply of high-interest currency, an appreciation of long-term low-interest currency (that is, a premium) and a depreciation of high-interest currency (that is, a discount).
According to rate parity's basic theory, the forward exchange rate is determined by the spot exchange rate and the domestic and foreign spreads. The forward premium of high interest rate currency (corresponding to foreign exchange premium) and low interest rate currency (corresponding to foreign exchange premium), the annual premium rate is equal to the spread between the two countries. The spread of this problem has become smaller, so the discount has become smaller.
Extended data
The impact of raising interest rates on the economy;
With the development of the banking system, because banks pay interest on deposits, idle small funds are deposited in banks, forming huge funds. Banks pay interest on deposits, which improves their ability to raise loan capital.
The adjustment of interest rate by banks has a great influence on the scale of loan capital accumulation. Under the condition of a certain amount of idle funds that can be accumulated in society, raising the deposit interest rate is conducive to absorbing deposits, while lowering the deposit interest rate is not conducive to absorbing deposits. The higher the interest rate, the more fully idle funds in society can be accumulated. Therefore, the level of deposit interest rate and the amount of deposits absorbed are positively changing.
The loan interest rate changes in the opposite direction to the borrower's income. Raising the loan interest rate will reduce the profits of borrowing enterprises, reduce profit opportunities, reduce borrowing behavior, and reduce the number of loans and investment scale.
When the loan interest rate increases to a certain extent, the borrowing enterprise will not only reduce the new loans, but even shrink the existing production scale, withdraw capital from the reproduction process, and convert the production capital into loan capital to obtain higher interest; On the contrary, lowering the loan interest rate, reducing the borrowing cost of borrowers, increasing income and increasing profit opportunities will increase borrowers' borrowing and expand production scale.
Therefore, the level of loan interest rate and the number of loans are inversely changing, and the state can adjust the credit scale by adjusting the level of bank loan interest rate.