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Why may inflows of short-term deposits create a problem?

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Question added by Shayan Ali , Accountant , Al Razi Company
Date Posted: 2016/06/18
Barkat Ali
by Barkat Ali , Accountant , Abdullah Bin Ahmed Bin Mohd Al Muzahmi Trading

Because they may be very rapidly withdrawn again and thus can contribute to instability of the exchange rate. To prevent sudden outflows of deposits (arising, say, from a fear by depositors that the exchange rate is about to fall) governments may be forced to raise interest rates: something they may otherwise prefer not to do.

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