Turkey's Central Bank Fiasco
One of the best aspects of the current financial system is the independence of central banks. While there are plenty of folks (mostly hanging out on the mises.org web site) who regard the growing power of unelected academics with suspicion, you'd struggle to find anyone who would prefer the bad old days of politicians steering interest rates.
Which makes what's happening in Turkey at the moment rather distressing. The nation's central bank, under the stewardship of Governor Erdem Basci, today cut one of its benchmark interest rates by a quarter-point to 7.50 percent, in line with economists' expectations. The country's Prime Minister Ahmet Davutoglu responded by calling the move insufficient, telling reporters further cuts are required. It's part of a pattern that's become sadly predictable in recent months.
Basci has been under almost constant attack from Turkey's political elite, who either don't understand or don't care what central bank independence is supposed to entail. "Conditions are in place for a rate cut of as much as 75 basis points given the data in our hands," Yigit Bulut, a senior advisor to Turkish President Recep Tayyip Erdogan, wrote in his Feb. 15 column in the Star newspaper. "Let the central bank have independence with regard to instruments, but at the same time let it be in harmony with the perspective put forth by the political will," Deputy Prime Minister Numan Kurtulmus said in an interview earlier this month.
When a slumping lira threatened to drive the inflation rate into double figures at the start of last year, Basci raised interest rates by 5.5 percentage points to reverse the trend. While he's unwound much of that tightening, he still hasn't moved quickly enough or far enough to satisfy the government.
It doesn't help that Erdogan and his officials seem to have studied a different economics textbook than the rest of the world. "High interest rates are not the result of a high inflation rate, they’re its cause," Yasin Aktay, the head of Erdogan's committee on foreign relations, said in June. Erdogan himself insisted at the start of this month that his central bank has a "wrong understanding" of how interest rates and inflation interact: "We know that interest rates are the cause. Inflation is the result."
Basci called today's rate move "measured," with the central bank emphasizing that, with food and energy prices both volatile, it's hesitant to cut rates further. Still, Economy Minister Nihat Zeybekci criticized the move. "I didn’t see anything courageous," he said in television interview. "I expected something more effective. We expect stronger decisions after this."
Here's how inflation and the benchmark interest rate have travelled since the beginning of last year:
Basci's skirmishes with the government have grown more intense even as he's reduced interest rates, unnerving investors who have responded by sending the country's currency to record lows while driving its borrowing costs higher. That should be a warning to the government. If politicians can't discipline themselves to be respectful of the central bank's independence, they'll have only themselves to blame if it suddenly gets tough to borrow money.
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