Raising interest rate alone can’t reduce inflation
A noted economist said raising interest rates alone may not be effective in reducing inflationary pressures, instead prescribing alternative steps such as increasing the supply of goods to combat rising prices.
Effectively addressing inflation requires a multifaceted approach that considers its diverse and complex causes, said Rizwanul Islam, a former special adviser for the employment sector at the International Labour Organization’s office in Geneva.
“While raising interest rates has become a global trend, monetary policy alone is not enough to control inflation,” he added.
“A more effective strategy, involving a thorough assessment of the economic landscape, combining supply-side interventions, supply chain management, and measures to reduce demand, is needed.”
Islam was speaking at the launch of his book, titled “Development and Globalization: Global and Bangladesh Perspective” and published by Baatighar, at the Policy Research Institute (PRI) office in the capital yesterday.
If the government continually raises interest rates, investment will be reduced, production may fall, and unemployment may rise, Islam cautioned.
Speaking at the event, Finance Adviser Salehuddin Ahmed said the government is trying to reduce inflation not only by raising interest rates but also by addressing supply-side issues.
A political government can do better in reducing extortion and easing supply-side problems if it wants, as they have that power, the finance adviser said. However, the interim government has no people who can work for the government to address the problems plaguing the market.
He added that the economy was in a dire situation in the recent past, but the situation has improved now to some extent, although some problems remain.
Regarding the gross domestic product (GDP), the adviser said although growth may not be high, there will be no food shortage.
The interim government will continue to work towards reforms in the banking sector, stock market, and revenue sector, he added. It will leave a mark in other areas as well, and it is expected that the next government will continue the reform activities.
Islam’s book covers a range of economic topics, from GDP to the middle-income trap, globalisation, and development strategy.
Addressing the middle-income trap, he said Bangladesh needs more than mere financial investment. “It needs substantial enhancements in technological capacity, labour productivity, and institutional efficiency.”
Development strategies must now be approached from a new perspective, where economic growth serves as the means to an end, with the ultimate objective being the improvement of living standards, he added.
Zaidi Sattar, Chairman of the PRI, said inflation is the result of a combination of demand-pull and cost-push elements. “The scope and chance for downward adjustment of tariffs to reduce inflation has, unfortunately, come and gone.”
Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, said Islam’s book gave more importance to vulnerability than poverty, a concept that has proved very important during the Covid-19 pandemic and especially in times of high inflation.
Kamran T Rahman, president of the Metropolitan Chamber of Commerce and Industry, Prof MM Akash, a former chairman of the economics department at the University of Dhaka, and Rushidan Islam Rahman, a former research director of the Bangladesh Institute of Development Studies, also spoke at the event.