Turkey’s Central Bank decided on Thursday to cut again on interest rates. Inflation in the Middle Eastern country is at 80%, and this move will likely make it even worse.
While Turkish president Recep Tayyp Erdogan was at the United Nations calling for a diplomatic resolution in the war between Russia and Ukraine, his own country was committing economical suicide. With inflation at the skyrocketing level of 80% (for comparison, in Europe it is a bit over 9%), Turkey’s Central Bank decided to cut again on interest rates.
This is a very unorthodox move: in economics, inflation is fought with high interest rates, not low. This is because high interest rates means less people will want to invest with that currency, therefore reducing the amount of liquidity available. Of course, this means less economical growth and a shrinking GDP, but with a slow and steady approach eventually inflation fades away.
This is exactly the strategy that’s being used by the US Federal Reserve, which increased interest rates by 0.75% just yesterday. This move alone made the Turkish Lira lose value (by a staggering 27%) because most of Turkish’s federal reserves are held in Dollars.
Anyway, things got even worse for Ankara’s currency once their Central Bank decided to cut interest rates even more, by 100 basis points to be precise. This means that inflation (already at 80%, as we said) could rise even more and probably become hyperinflation. And as always, the biggest effect of this will be experienced by the common population.
Erdogan’s strategy
Many economists around the world scratch their heads trying to figure out why Erdogan would kill his own currency like this. Indeed, many people inside Turkey herself wondered the same. Last year, Erdogan fired two Central Bank deputy governors by the names of Semih Tümen and Uğur Namık Küçük which were staunchly against cutting interest rates any further. They were replaced by a personal friend of Erdogan who, surprisingly, agreed with his strategy.
“Inflation is not an insurmountable economic threat. I am an economist,” said Erdogan after claiming that inflation will eventually go away once the interest rates are low enough.
While it would be easy to dismiss this as some bizarre vices of a cruel dictator, we must not forget that Erdogan holds the keys for the Middle East. Turkey and Israel are probably the two biggest American assets in the region, but Erdogan is pointing his feet.
Turkey may be a part of NATO, but Erdogan is dangerously close to Russia in many foreign agendas, including Syria and the resolution of the Turkish Kurds. Turkey’s good relations with Russia are self-evident when looking at the efforts she made to mediate in the conflict.
Erdogan may have imperial ambitions, but his economic policy could be his demise.
