The public mood is extremely fragile at present. In reality, it is the worsening state of people’s finances that is intensifying their frustration. In particular, people have become deeply distressed and angry under the burden of the runaway prices of essential commodities. For several years now, a large portion of household income has been spent merely on buying rice, lentils, cooking oil and other kitchen essentials.

The ousted Awami League government failed to keep the prices of essentials affordable. During the tenure of the Yunus-led administration, prices became even more uncontrollable. Even under the current BNP-led coalition government, the “runaway horse” of soaring prices cannot be reined in. It continues to gallop unchecked.

The Awami League government relied mainly on raising interest rates as a tool to control inflation. The interim government under Yunus increased interest rates even further. The BNP government is also continuing along the same path. Relying on Bangladesh Bank’s contractionary monetary policy, it is persistently attempting — unsuccessfully — to control inflation by treating higher interest rates as the sole solution.

According to classical economic theory, increasing interest rates reduces the money supply in the market. People spend less and instead deposit their money in banks in the hope of earning higher returns. Likewise, those who would normally take loans to expand businesses, make new investments or purchase luxury goods become reluctant to borrow at higher interest rates. Consequently, less money circulates in the market.

In theory, inflation should then decline automatically.

But that is not happening. Inflation has not fallen; according to the latest figures, it has actually increased. Bangladesh Bank, however, remains fixated on interest rates as though they were a sacred doctrine, repeatedly raising them in an exhausting effort to curb inflation. Yet inflation has not eased, while other sectors of the economy have begun to weaken.

British economist and Cambridge University professor Caroline Elvins recently argued in an article published by the renowned outlet Project Syndicate that inflation cannot be controlled solely by raising interest rates. Inflation arises from various causes, and those causes cannot be resolved through a single method alone.

Caroline stated that many countries now focus almost exclusively on raising interest rates to control inflation, but this strategy is no longer functioning effectively. Like many other countries, Bangladesh faces runaway inflation as one of its greatest economic challenges. To tackle it, the central bank has repeatedly increased interest rates as a conventional economic tool. However, an analysis of global market trends and Bangladesh’s domestic market structure shows that raising interest rates alone cannot control inflation; in many cases, it may even prove counterproductive.

In her article, Caroline notes that one of the major causes of current inflation is the rise in global fuel prices and disruptions in supply chains. This is highly relevant for Bangladesh. Because Bangladesh is heavily import-dependent, increases in the global prices of fuel or raw materials raise domestic production costs. Higher interest rates then increase borrowing costs, which ultimately push product prices even higher. In other words, while interest rates may restrain demand, they cannot easily control supply-driven inflation.

Caroline Elvins argues that central banks traditionally raise interest rates to reduce inflation. However, current inflation is not “demand-pull” inflation but rather “cost-push” inflation. When inflation is caused by rising fuel and raw material prices, increasing interest rates becomes an ineffective tool. Yet Bangladesh continues to pursue this policy — theoretically sound perhaps, but largely flawed in practice.

Rising interest rates are increasing borrowing costs. As a result, the establishment of new factories and the expansion of businesses are stalling. According to Elvins, this could push the economy towards “stagflation” — a period of stagnation without growth or investment, accompanied by rising unemployment alongside high prices.

One important observation in Caroline’s article concerns “greedflation” — excessive corporate profit-making. She points out that many large companies have increased prices far beyond actual production costs simply to boost profits. Raising interest rates cannot regulate such corporate behaviour.

A significant portion of Bangladesh’s inflation is artificial. As highlighted in the article, certain large corporations or influential groups exercise monopolistic control over price-setting. In Bangladesh, syndicates are frequently blamed for manipulating the markets for essentials such as rice, lentils, sugar and onions. While higher interest rates put pressure on ordinary businesses, these powerful syndicates remain largely unaffected. Consequently, monetary policy becomes ineffective in such circumstances.

The article also describes high interest rates as a form of “punitive measure”. In Bangladesh, when interest rates rise excessively, small and medium enterprises — along with many other entrepreneurs — halt new investments. This reduces production and increases the risk of unemployment. When production declines, shortages emerge in the market, which in the long run further fuels inflation.

One major cause of inflation in Bangladesh is the depreciation of the taka. As the currency weakens against the US dollar, the prices of imported goods have surged several folds. This cannot be resolved merely by increasing interest rates. What is required instead is stability in foreign exchange reserves and a balance in export earnings and remittance inflows.

Caroline’s article rightly states that inflation is not merely a “technical” issue; it is also a “political choice”. If the government simultaneously raises interest rates under contractionary monetary policy while borrowing heavily from the central bank by printing money to finance budget deficits, ordinary people gain no benefit from higher interest rates. In Bangladesh, there is often a lack of effective coordination between monetary policy and government fiscal policy.

If policymakers continue pursuing a “single-point demand” approach of only raising interest rates to control inflation, without reassessing the situation and considering alternative measures, Bangladesh may gradually slide towards a recession characterised by low growth and weak investment. Eventually, inflation could rise even further, reaching levels that would become extremely difficult to bring under control.

A review of Bangladesh’s current economic situation through the lens of Caroline Elvins’ article shows that inflation has not become tolerable despite high interest rates. Yet investment has undoubtedly suffered. Entrepreneurs are unwilling to borrow at such high rates because business and investment are no longer profitable under these conditions. Consequently, investment is falling, jobs are not being created and people’s incomes are declining. Since this inflation is largely cost-push rather than demand-driven, production suffers in the absence of investment. That leads to lower supply in the market, which in turn drives prices even higher. Thus inflation does not decline, while weak investment and sluggish business expansion create supply shortages that further increase prices. Inflation rises even more, while certain groups continue to earn excessive profits — the very groups widely believed to operate through market syndicates.

In such a situation, the government should not view interest rates as the sole instrument for reducing inflation. Instead, it should adopt a comprehensive strategy. This could include making interest rates more rational and affordable. Even if inflation rises somewhat as a result, increased investment and economic growth could offset the damage. Other necessary measures include breaking up market syndicates through strict legal action, providing subsidies to agriculture and industry, encouraging domestic production through incentives to reduce import dependence, stabilising the value of the taka by reducing volatility in the dollar market and developing domestic energy sources to lessen reliance on international markets. In addition, corporate entities accused of making excessive profits or engaging in syndicate practices could be placed under greater scrutiny and subjected to a “windfall tax” on extraordinary profits.

Since inflation in Bangladesh is not decreasing despite rising interest rates — while investment is stalling, growth is slowing, overall economic activity is stagnating and the private sector is suffering — policymakers must urgently adopt strategies to revitalise the economy. Otherwise, the country risks bringing disaster upon itself by keeping interest rates excessively high while paralysing every other sector of the economy in a futile attempt to fight inflation. The Ministry of Finance, Bangladesh Bank and all relevant authorities should take swift action immediately.

Writer: Senior Journalist and Managing Editor, Kaler Kantho