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Here's a template to answer inflation related commercial awareness questions in Investment Banking interviews..
Make sure to keep your response in the interview structured and brief.
Know your numbers - i.e. inflation readings, mortgage rates etc.
Here is a model answer that can be refined...
UK inflation more than halved to 4.6% in October from its peak of 11% earlier this year.
Lower inflation is good news for the economy as it generally reflects in lower mortgage rates, higher consumer spending and higher property prices.
However, BOE would need to see a consistent reading of lower inflation, perhaps another 3 to 6 months in the 2 to 4% bracket before they consider bringing down interest rates.
Lower interest rates help sectors such as ..
1. Real Estate
2. Consumer Discretionary
3. Financial Services and
4. Related support businesses such as legal/admin etc.
Re Valuations of equity, lower interest rates allow for higher DCF valuations as cost of debt is lower resulting in a lower WACC being used to discount future earnings.
Especially true for hyper growth stocks in sectors such as Tech.
Overall, we should see a rising stock market coupled with higher M&A deal flow if interest rates reduce significantly over the next year or two.
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