Paul Volcker was a very important central banker in the United States. He passed away in 2019 at the age of 92. Volcker helped control high inflation in the US during the 1980s, even though it was very difficult. Inflation had reached 15% in 1980. He raised interest rates to 21.5% in 1981, which stopped inflation but also caused economic problems and cost President Jimmy Carter his re-election.” High Inflation and Interest Rates in Pakistan”
Volcker’s actions helped stop inflation, but they also caused a recession and high unemployment rates above 10%. His decisions were both praised and criticized.
In the last two years, Pakistan has also faced very high inflation, similar to the US in the 1980s. The Russia-Ukraine conflict made oil prices go up, causing inflation to reach 38% in May 2023, then drop to 17.3% in April 2024. The central bank of Pakistan decided not to change interest rates.
High inflation has made life hard for everyone in Pakistan, especially for the poor who spend most of their money on food. Last year, food prices went up by 48%. The political instability in Pakistan has not been directly linked to inflation, but the high prices and social unrest may be related.
High inflation is very harmful to society. Economists are not sure how much high interest rates can control inflation. Some think central banks should control the money supply, while others believe inflation is caused by shortages in supply, not just by money issues. High interest rates can slow economic growth and stop job creation.
The State Bank of Pakistan kept the interest rate at 22%, which some analysts criticized. They thought the central bank should lower the rates to help economic growth. However, there are reasons to keep rates high:
- Inflation is still high in countries like the US and UK, which affects global prices.
- The world is moving away from globalization, leading to higher costs.
- Lower interest rates could weaken the currency as investors look for higher returns elsewhere.
- Inflation in Pakistan is still high at 17.3% compared to last year. Prices are still rising, but more slowly.
Pakistan’s central bankers had good reasons to keep interest rates the same. If conditions improve, there may be a chance to lower rates next month. Central bankers must make decisions based on what is right, not on political or social pressure, just like Paul Volcker did. “High Inflation and Interest Rates in Pakistan”
The writer has a doctorate in economics from a Fulbright scholarship.