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?

Both statements are correct, and Statement-II is the correct explanation for Statement-I.

Statement-I is correct: Following the COVID-19 pandemic, central banks worldwide (including the US Federal Reserve, European Central Bank, Bank of England, and Reserve Bank of India) carried out aggressive interest rate hikes to combat rising inflation caused by supply chain disruptions, pent-up demand, and geopolitical factors.

Statement-II is correct: Central banks operate on the fundamental assumption that monetary policy tools — primarily interest rate adjustments — can effectively counteract rising consumer prices by influencing money supply, credit conditions, and aggregate demand.

Statement-II explains Statement-I because the very reason central banks raised interest rates (Statement-I) is their belief that monetary policy can counteract rising prices (Statement-II). The rate hikes were a direct application of this assumption — central banks raised rates precisely because they believed doing so would curb inflation.