Higher interest rates attract more foreign investment: Hot money flows, i.e., the flow of investment from one country to another country to capitalize on interest rate fluctuations and on anticipated exchange rate fluctuations, are impacted by higher rates. For example, companies and investors are more likely to park capital in Pakistan banks as the Federal Reserve engages in a series of interest rate hikes. That's because rate appreciation translates into higher investment gains with Pakistan financial institutions in a rising rate environment. They will park their money for some and after yealding payouts they will withdraw their investment and will demand more for reinvestment.
Country export scenarios weakens: In a higher interest rate environment, country exports weaken, while imports tend to become more competitive, as currency values strengthen. For instance, a stronger dollar makes it more likely companies doing business in countries that haven't hiked rates (like China, which has largely maintained its interest rate levels in 2018) will steer more business investment to the U.S. to capitalize on a stronger dollar and a more robust economy.
Rising interest rates lead to higher taxes: In the U.S., the talk from the White House focuses on a continuation of lower tax policies, but that runs against taxation trends in a rising rate environment. Here's why – higher interest rates hike the already high cost of federal government interest payments on borrowed debt, leading to government budgetary pressures. One of the easiest ways out for economic policy makers is to advise the federal government to boost taxes to cover those higher interest payments, thus making it more expensive for companies to conduct business in that country. That's one reason why President Trump has been such a harsh critic of the Federal Reserve's rate hikes – they threaten the viability of more U.S. tax cuts.
