The Hong Kong government announced the issuance of additional inflation-linked bonds (iBonds) in 2022-23 financial year. Suppose iBonds pays an interest rate of 2% and the investors expect the inflation rate will be 1.4% next year. Will the investors gain or lose? By what percent?

Recall that the relationship between nominal interest rate and expected inflation rate is:

Expected real interest rate = Nominal interest rate + Expected inflation rate

Therefore, Expected real interest rate = 2% - 1.4% = 0.6%. The purchasing power of investors is expected to increase by 0.6%.

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