The Revival Of “Hyperinflated” Turkish Lira

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. MoreĀ 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.

Inflation Trends

Core Inflation

Governments ignore to learn and memories are short.

The Limits of Rationality in Monetary Policy

When your search for “central bank government pressure” on Google, the top three results are related to Turkey just hours before the monetary policy committee meeting to take place. Central bank independence has been one of the most important policies imposed by the International Monetary Fund in less developed countries since mid 90s. And so far stability in currency rates and lowering inflation has proved the success of the policy where they have been adopted, especially in Turkey after a decade of hyperinflation and two currency crisis.

This morning we will see if monetary policy makers of the country give a good account of rational or not. The prime minister and members of the ruling political party frankly have spoken of the need for rate cut based on their new own macroeconomic approach claiming that rising rates inflate the prices, which of course can refuted by entry-level economics student.

and here I present why rate cuts could be the killer of the Turkish lira. It requires just a little knowledge and understanding of economics.

Turkey - Inflation and Interest Rates

Turkey - Inflation Expectations