Superimposed on the underlying pattern of long-term rates in international markets there is a set of differentials that reflect the inflation expectations present in each country and the related medium-term expectations concerning the exchange rate.
The response of long-term yields to a change in official rates depends on the conditions in the economy, the economic policies in force and, in particular, on the stance and firmness of monetary policy. The experience of the last few years in financially open economies with exchange rate flexibility between the major areas confirms the effectiveness of monetary policy in controlling inflation.