Hiking interest rates to tame inflation hardly a solution

Sahar Jahanara

Karachi

This is apropos a Business Recorder op-ed “A regressive interest rate policy” carried by the newspaper last week. The writers, Shahid Sattar and Eman Ahmed, seem to have successfully advanced their argument, underscoring the need for lowering the interest rates in an impressive manner. According to them, for example, “This belief was emphasized by Nobel laureate Joseph Stiglitz, who recently described how within the US economy and others possessing market power, companies can afford to raise prices without losing business. Meanwhile, standard economic models suffer from even more inflation when subjected to rate hikes.”

In my view, however, Prof Stiglitz’s argument is mainly relevant to documented economies such as Western Europe’s or US’. Insofar as Pakistan is concerned, the size of informal or undocumented economy is pretty large. Hiking interest rates to tame inflation is therefore hardly a successful approach to the challenge of soaring inflation. What about ‘imported inflation’? Is there any monetary tool available at the disposal of central bank that it can successfully employ to deal with price hike caused by rise in prices of imported commodities, although inflation means the decrease in the value of money while price hikes are the increases in the prices of one or more commodities? In sum, the challenge of inflation has so many parts or aspects that it is difficult to understand or deal with it in any effective and meaningful manner.