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?

Answer: A. Both statements are correct and Statement-II is the correct explanation for Statement-I. Statement-I: Many central banks worldwide hiked interest rates post-pandemic. CORRECT. In 2022-23, the US Federal Reserve raised rates from near zero to over 5%, the ECB raised from negative to 4.5%, the RBI raised the repo rate from 4% to 6.5%, Bank of England, Bank of Canada and others similarly tightened. This was the most synchronised global tightening since the 1980s. Statement-II: Central banks assume they can counteract rising consumer prices via monetary policy. CORRECT. The standard monetary economics doctrine holds that raising the policy rate cools demand and inflation expectations. This is precisely WHY central banks hiked: they believed (and observed) that rate hikes would suppress demand-driven inflation. So Statement-II is the very rationale (II explains I) for the post-pandemic tightening cycle (I). Source: RBI Monetary Policy reports / IMF World Economic Outlook / standard macroeconomics.