Interest Rates in Different Currencies and Inflation Rates

This page presents an analysis of borrowing money in different currencies where the inflation rate is very different in local currency then in an international currency such as USD.  For example, if the inflation rate is 16% in Nira and is 1.5% in USD, how does an interest rate of 23% in Nira compare with an interest rate of 7% in USD.

In particluar if the credit spread above the base rate in USD is 4%, this would be equivalent to a much higher credit spread in local currency in the example above because the credit spread as well as the base rate should be adjusted for inflation. Of course if the cash flows or the revenues are in USD, it would be dangerous to borrow in local currency because of currency risk.

To demonstrate how to perform the analysis, the excel file below works through an example with two currencies.  In the example as with other cases where there is more than one currency in terms of costs, it is best to start with a PPP exchange rate and present all of the cash flows in two currencies.