Consider the following statements :
- Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
- Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
Statement-II states that Central Banks generally assume they have the ability to counteract rising consumer prices via monetary policy means. This is also correct. Controlling inflation and maintaining price stability is one of the primary mandates of most central banks. Monetary policy tools, such as adjusting interest rates, managing liquidity through open market operations, and setting reserve requirements, are designed specifically to influence aggregate demand and inflation. Central banks operate based on the assumption that these tools can effectively manage inflation, although the degree and speed of impact can vary.
Statement-II provides the fundamental reason why central banks resort to actions like interest rate hikes (as mentioned in Statement-I) when faced with rising consumer prices. They raise rates because they believe this monetary policy tool can help bring down inflation. Therefore, Statement-II is the correct explanation for Statement-I.
– Statement-II correctly describes the core belief of central banks that monetary policy can be used to combat inflation.
– Statement-II explains the rationale behind the action described in Statement-I (raising rates to fight rising prices).