Changes  BIS Review 96/2006  5  in the domestic interest rate affect nominal foreign exchange rates through, for example, arbitrage between domestic and overseas interest rates. The resultant movements in nominal foreign exchange rates will alter competitiveness in export industries, thereby affecting either the profitability or the volume of exports.
A third route operates via changes in asset prices influencing investment and consumption behavior. With the ongoing accumulation of financial assets in recent years, changes in equity and land prices are thought to have a greater impact on the spending behavior of firms and households. Finally, other routes such as changes in interest rate returns affecting corporate profits are also important.