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?
- (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I ✓ UPSC's answer
- (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
- (c) Statement-I is correct but Statement-II is incorrect
- (d) Statement-I is incorrect but Statement-II is correct
Why the answer is (a)
• After the pandemic, supply disruptions, stimulus spending and the Ukraine war pushed inflation to multi-decade highs; from 2022 the US Federal Reserve, ECB, Bank of England, RBI and others raised policy rates sharply — Statement-I is correct.
• Central banks act on the premise that higher interest rates cool demand, credit and expectations, and so bring consumer-price inflation back to target — Statement-II is correct.
• That belief in the potency of monetary policy against inflation is precisely why they hiked rates, so Statement-II explains Statement-I.
• The RBI raised the repo rate from 4% to 6.5% between May 2022 and February 2023 under its inflation-targeting mandate.
• Hence option (a).
Why the other options are wrong
- (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct…
- The belief that monetary policy can tame inflation is exactly why rates were raised, so II explains I.
- (c) Statement-I is correct but Statement-II is incorrect
- Statement-II is correct: central banks do assume monetary policy can curb inflation.
- (d) Statement-I is incorrect but Statement-II is correct
- Statement-I is correct: rate hikes were widespread after the pandemic.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2023, held on 28 May 2023. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.