Why are Central banks not raising interest rates despite rising oil prices?

This episode of InFocus by The Hindu explores a growing global paradox: why major central banks—including the U.S. Federal Reserve, the European Central Bank, and India’s RBI—are holding interest rates steady despite a sharp rise in oil prices due to escalating conflict in West Asia. Traditionally, central banks respond to inflation by raising rates to cool demand, but Professor Rohit Azad from JNU argues this playbook is flawed in the current context. He contends that today’s inflation is primarily cost-push, driven by supply-side shocks like disrupted oil flows, not demand-pull pressures. Raising rates in such a scenario would only worsen economic stagnation, especially in economies like India where growth is already fragile and inequality is high. Azad critiques the rigid adoption of Western monetary frameworks, particularly inflation targeting, which he says misapplies demand-side tools to supply-side problems. He advocates for a shift to fiscal policy—such as cutting excise duties on fuel and investing in agriculture—to directly address cost pressures while boosting demand. He also highlights how capital controls could allow policy autonomy, though they remain politically and ideologically challenging. The episode concludes with a call for rethinking the role of central banks, emphasizing that monetary policy is not a panacea and that the real burden of adjustment should not fall on the poor and informal sector.