When a central bank raises interest rates to combat inflation, it increases the cost of borrowing. For a country with high public debt, this leads to higher debt servicing costs as existing debt may need to be refinanced at higher rates and new debt becomes more expensive to issue. This adds pressure on fiscal policy, forcing the government to:

• Reallocate spending toward debt servicing, potentially reducing expenditure on other priorities.
• Consider raising taxes or reducing fiscal deficits, which could strain economic recovery efforts.

A is incorrect: Higher interest rates increase debt servicing costs.
C is incorrect: Higher debt servicing costs reduce fiscal space.
D is incorrect: High debt can increase the risk of fiscal dominance, and raising rates exacerbates this tension.