2023-08-24 16:52:36
That looks like a huge jump: The central bank in Turkey is raising its key interest rate from 17.5 to 25 percent, much more than expected. On the foreign exchange market, the Turkish lira appreciates a bit. At second glance, a policy rate of 25 percent looks less impressive because the inflation rate is close to 50 percent. Further rate hikes are likely to follow.
The Turkish example is instructive because it shows the consequences of first underestimating inflation and then fighting it incorrectly. President Recep Tayyip Erdogan had long advocated counteracting rising inflation rates with falling interest rates. Since interest rates are a cost factor for companies, he believes that falling key interest rates should go hand in hand with falling costs for companies. This gives companies the opportunity to lower the selling prices for their goods without fearing for their profits.
According to this interpretation, falling and not, as the prevailing theory postulates, rising key interest rates lead to a fall in the inflation rate. A comparable argument is represented by economic schools, which are no longer widespread, and which basically explain the economic process solely through the conditions of the supply of goods.
Published/Updated: Recommendations: 1 Christian Siedenbiedel Published/Updated: , Recommendations: 10 Christian Siedenbiedel Published/Updated: , Recommendations: 9
The Turkish experience does not support this view, but rather confirms the theories that are widespread today, according to which a sustained inflationary process can be explained primarily by the demand for goods – even if, as in recent years in the euro zone, at the beginning of the process by shortages energy and food price jumps caused by supply.
According to this view, falling key interest rates fuel inflation because they stimulate demand through favorable financing conditions for loans. The monetary policy conference beginning this Thursday in Jackson Hole, USA, could provide information on how the central bank in Washington envisages further interest rate developments.
#Inflation #Turkey #interest #rate #experiment #wrong