Unnerved by surging prices, the Bank of England on Thursday became the first major central bank to hike interest rates since the pandemic began. The US Federal Reserve will follow in the coming months, with three rate hikes expected next year.You can quibble over the timing or the size of interest rate hikes, but just about every economist agrees that when prices rise quickly, higher borrowing costs can help reduce demand and inflation.Not in Turkey, however, where President Recep Tayyip Erdogan has repeatedly pushed the country’s not-so-independent central bank to cut interest rates despite soaring inflation. And the bank is doing precisely that, with potentially disastrous consequences.
Consider: Consumer prices in Turkey spiked by 21.3% in the year to November. Economists think that inflation could go even higher, with a rate of up to 30% possible over the next six to nine months.
Meanwhile, the Turkish lira is plunging. The currency has lost more more than half its value against the US dollar so far this year, and is on track for its worst performance since 1995. The slide is difficult to stop because the central bank does not have significant foreign currency reserves.