Worried about rising prices on Thursday (16), the Bank of England became the first major central bank to raise interest rates since the start of the pandemic.
The US Federal Reserve System (FRS) will do the same in the coming months, expecting a threefold increase in interest rates next year.
You may doubt the timing or the amount of interest rate hikes, but almost all economists agree that when prices rise rapidly, higher borrowing costs can help reduce demand and inflation.
Not in Turkey, however, where President Recep Tayyip Erdogan has repeatedly pressured the country’s not-so-independent central bank to cut interest rates despite rising inflation. And the bank is doing just that, with potentially disastrous consequences.
Consumer prices in Turkey rose 21.3% year-on-year against November. Economists believe inflation could rise further – up to 30% in the next six to nine months.
Meanwhile, the Turkish lira is plummeting. The currency has lost more than half of its value against the US dollar this year and is on track for its worst performance since 1995.
The decline is difficult to stop because the central bank does not have significant foreign exchange reserves. On Thursday, the bank cut interest rates for the fourth month in a row from 15% to 14%.
“President Erdogan continued to dictate to the heavily purged central bank to test his unorthodox view that lower interest rates are needed to keep inflation down.” said Jason Tuvey of Capital Economics.
Seeking to ease the suffering of workers, many of whom have struggled to get rid of the lira in exchange for foreign currency, Erdogan on Thursday announced a nearly 50% increase in the country’s minimum wage.
“I believe that with this increase we have demonstrated our determination to prevent workers from being crushed under the weight of rising prices,” the president said at a press conference.
The move could give Erdogan a political boost. But higher wages are a known factor in inflation and can worsen the situation in the country.
Other countries continue to take a more orthodox approach. Russia raised interest rates by 1 percentage point on Friday (17) to combat rising prices.
