The strategy of massively increasing interest rates in order to curb the skyrocketing inflation failed in India and in the USA. Opposite to this, a huge reduction in inflation in Japan was reported with interest rates being zero. Even though inflation has reduced in Britain and Germany, but as per experts, this is the result of supply-increase rather than the increase in interest rates. The highest 4.25% increase in interest rates was made by the American central bank, Federal Reserve, in the last year.
But during this period, inflation in the country came down by only 0.10%. In India, the Reserve Bank increased the repo rate by 2.25% in several installments, but the retail inflation rate decreased by only 0.22%. In South Korea too, the inflation rate fell by almost half in response to an increase in interest rates.
Madan Sabanvis, Chief Economist, Bank of Baroda, said that when inflation increases as a result of reduction in supply, increasing interest rates does not create much of an impact. This technique of the central banks proves to be more effective when the high inflation rates are a result of an exploding increase in demand.
