Based on macroeconomic theory, suppose inflation turns out to be lower than expected; this leads to lenders having more purchasing power than expected and borrowers having more debt.
This is because when the inflation rate is lower than expected, the inflation-adjusted repayment will be greater than what was predicted by both parties, thereby making the borrowers have more debts in their accounts in terms of money value.
On the other hand, if inflation turns out to be greater than anticipated, the situation would favor the borrowers.
Hence, in this case, it is concluded that the inflation prediction determines the rate at which interest rates on loans are determined.
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