ADB warns sharp rate hikes could hurt investment growth

SAMARKAND, (Uzbekistan): The Asian Development Bank has cautioned against aggressive interest rate hikes to curb inflation driven by temporary global shocks in food and energy prices, warning that such tightening could undermine investment. “ADB does not advocate simply chasing higher energy and food prices by raising interest rates, as this can reduce investment, ” said Albert Park while responding to a question from Business Recorder during a press briefing in Samarkand on Wednesday. READ ALSO: Inflation: Pain ahead 1 Park was joined by Neil Foster-McGregor and Adul Abiad, who emphasised that macroeconomic stability is essential for attracting foreign direct investment (FDI). Park noted that interest rates are generally not the preferred tool to address inflation caused by external market shocks that are not embedded in the broader basket of goods and services. Referring to Pakistan’s situation, he described it as a “classic trade-off” for central banks—balancing the need to raise rates to curb inflation and manage expectations, while also maintaining lower rates to support investment and economic growth. He further said that it’s always just thinking about finding the right balance, and another key principle is that if the higher inflation and temporary supply shocks are coming from international markets, that’s not something that is built into the broad basket of goods and services in the economy. “So usually don’t use interest rates to address inflation that’s caused by those types of factors, but focus on core inflation, which is the other goods and services”, said an ADB official, adding and see if those prices are rising, that’s going to create expectations among the whole population that this is what inflation is going to look like. “It’s going to create pressure for companies then to raise wages in line with rising inflation. It locks in higher rates of inflation, which creates more uncertainty and often is not beneficial, especially to poor households whose wages may not be rising at the same rate as inflation”, he added. The chief Economist further said that the Bank’s forecast for Pakistan inflation were 6. 4, 6. 5 this year and next year. He said that it depends on how you assess what’s causing that spike in inflation. If you’re just chasing down higher energy prices and food prices and raising interest rates and that reduces investment, that’s not what we advocate, unless it’s really core inflation, he added. Replying to another Business Recorder’s question about Pakistan, the ADB officials emphasized that macroeconomic stability remains a critical foundation for attracting FDI and integrating into global value chains. Pakistan remains on the “edge” of integrating into global value chains, highlighting the urgent need to build capabilities aligned with evolving global demand — particularly in digital and technology-driven sectors. “FDI follows capabilities, ” officials said, noting that multinational firms invest in locations offering skilled labour, resilience, and reliable policy frameworks rather than merely favourable trade policies. They stressed that while trade policy reforms are important, the real challenge lies in developing domestic capabilities, fostering partnerships with international firms, and ensuring a stable macroeconomic environment. Copyright Business Recorder, 2026

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