The Role of Supply and Demand in Inflation: Why Pakistan Needs a Holistic Approach

According to conventional economic theory, raising interest rates can help reduce inflation. The idea is that higher interest rates lead to decreased demand, as people buy fewer goods, and businesses invest less, generate fewer jobs, and offer lower pay raises. As a result, people have less money to spend, and prices go down. However, a comparison of Pakistan’s historical interest and inflation rates suggests that a rate hike does not lead to lower prices.

This theory assumes that inflation is caused by higher demand, which is not the case in Pakistan. Instead, the country’s high prices are primarily driven by exchange rate depreciation. As Pakistan depends heavily on imports, the root cause of inflation is a supply-side issue, not a demand-side issue. Therefore, a rate hike is unlikely to make onions, or any other imported goods, cheaper.

Furthermore, while higher interest rates are supposed to attract foreign investment, it is unlikely that investors would want to invest in a country that has been rated Caa3 by Moody’s, which is a speculative grade rating for long-term corporate obligations.

In conclusion, while conventional economic theory suggests that raising interest rates can help reduce inflation, this may not hold true in Pakistan’s case. The country’s high prices are driven by supply-side factors, and the lack of investor confidence due to its low credit rating further diminishes the impact of any rate hike.

Syeda Qandeel Zehra
Syeda Qandeel Zehra
Syeda Qandeel Zehra is a senior content writer with writing expertise in different niches. She is an MBA graduate by qualification and loves to write about diverse topics. Zehra has 3 years of writing experience and currently employed at as a content writer.


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