Inflation targeting is a successfully pursued monetary policy in countries who suffered high inflation for years such Zimbabwe. Turkey also set a new policy framework in purpose to lower the inflation and stabilize the currency rates. Under normal circumstances interest rates are expected to raised by the central bank provided that Turkey is an economy with a huge current account deficit and increasing inflation rate. Rising rates will both make Turkish lira more attractive to carry trade funds to finance the deficit and restrain the household demand that causes high inflation.
However what we recently have seen in Turkey is the politicians arguing against the independence of the central bank, like the ones Zimbabwe who paved the way for the central bank issuing 250 trillion notes. Moreover our politicians are also generating some economics theory that claims high rates cause high inflation. This sounds like tales from the newer-abnormal.
Meanwhile the inflation numbers came out this morning showing that inflation has not lost its momentum yet, contrary to expectations. More terrifyingly everyone in Turkey is so sure that our central bank will recklessly cut the rates with the lower inflation expectations even if the numbers indicate the contrary.
Charts below are explaining.
Governments ignore to learn and memories are short.
