Interest Rate Hikes Fail to Tame Fuel Inflation, Says Ejaz

Dr. Gohar Ejaz, Chairman Economic Policy and Business Development think tank and former caretaker federal minister on Wednesday sharply questioned the effectiveness of monetary tightening in tackling Pakistan’s fuel-driven inflation, arguing that raising interest rates would only inflate debt servicing costs without addressing the root causes of price pressures.

In a strongly worded statement, the former caretaker federal minister and chairman of the Economic Policy and Business Development think tank said that recent increases in policy rates— by 100 basis points—cannot influence international fuel prices, which remain the primary driver of domestic inflation amid ongoing global conflicts and supply disruptions.

Citing the views of Nobel laureate Joseph Stiglitz, Ejaz stressed that supply-side shocks, particularly those stemming from global commodity and energy markets, are not effectively managed through higher interest rates. “Monetary tightening cannot bring down imported inflation,” he said, adding that such policies risk suppressing economic activity without delivering meaningful relief to consumers.

He questioned whether the State Bank of Pakistan’s decision to hike rates could either reduce fuel consumption significantly or alter international pricing dynamics, arguing that the answer in both cases is “clearly no.”

Highlighting the fiscal consequences, Ejaz warned that every one percent increase in borrowing costs adds approximately Rs600 billion to the government’s annual interest payments. “At a time when debt servicing is already projected to exceed Rs8 trillion this fiscal year, such policy moves will only deepen fiscal stress,” he noted.

He further cautioned that the ballooning cost of debt would inevitably translate into additional taxation, placing a heavier burden on citizens already grappling with high inflation and stagnant incomes. “This is not just a monetary issue—it is a fiscal and structural crisis,” he said.

Ejaz urged policymakers to rethink the reliance on interest rate hikes as a primary tool for inflation control and instead focus on supply-side interventions, energy reforms, and measures to enhance domestic production. “Without addressing structural inefficiencies and external vulnerabilities, tightening monetary policy will only exacerbate the economic slowdown,” he added.

The statement comes amid ongoing debates over Pakistan’s macroeconomic strategy under its IMF-supported programme, where balancing inflation control with growth and fiscal sustainability remains a key challenge.