Turkey has been suffering with severe inflation, where people are complaining and crying about how they will feed their children if the prices keep rising. While this is happening, Turkey’s central bank announced a bigger-than-expected interest rate cut. Opposition parties and the people are really concerned and questioning the independence of the central bank. Opposition leaders have condemned this action. Meral Aksener, head of the country’s third largest opposition party, called it “an irrational decision made by a frivolous government through an unqualified bureaucrat.” With all this going on, Lira has hit an all time low with this action. It is now at 9.49 against the US dollar. This year alone, Lira has lost 20% of its value. Import companies were already at a verge of bankruptcy when the Lira was at 8 against the US dollar, now it is even harder to continue business and pay off debt. This interest rate cut has triggered a chain reaction and caused a shift in related economic behaviors. This entire situation is reminding people of the inflationary cycle that gripped in the 1990s. Signs indicate that turkey is going towards a breaking point. When the inflation is already 5 times the target value, interest rate cuts don't make sense. It will eventually increase the long term interest rates. This action is a lot of risk and not consistent with the macro economic fundamental. Is the central bank really independent in Turkey or the people claiming it to be influenced by the ruling party is true.
source:
https://www.aljazeera.com/economy/2021/10/21/as-turks-wrestle-with-inflation-central-bank-cuts-rates-again
2 comments:
One of the first things we learned in macroeconomics is that interest rates should be increased when high inflation is considered too high. This decision along with the firing of leaders in the central bank is cause for great concern in the Turkish government. Their economic situation is quite unique and it will be very interesting to see how this plays out.
The main point of the Central Bank is to be independent. There should not be any intervention from the government in the Central Bank's job. Also, it does not make sense to cut interest rates. If there is high inflation, interest rates should be increased. However, the Turkish Central Bank decided to cut them. By doing that, the money supply will increase. Thus, inflation will increase
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