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4min chapter
Turkey's runaway inflation problem
Planet Money
Turkey's Central Bank Governor Will Play a Role in Monitary Policy Going Forward
Turkey's central bank has gone through three governors since 20 ninet. That's a lot of turnover. And then the central bank went in the opposite direction. Instead of raising rates, lowering them. If you plot the inflation rate in turkey, what we have seen in the last six months is really one of a kind. When we all expected the central bank to hi crates, we have seen these rate cuts. And that's how we have seen inflation getting out of control. Some say the government might be low balling those numbers. Now the turkish central bank has a big credibility problem. Economists, investors, businesses, regular people think the central bank is too beholden to politicians
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Speaker 5
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Speaker 1
20 18, when ardoan went on bloomberg t v and doubled down on his idea that high interest rates cause inflation. That was not the only thing he said that scared investor. They
Speaker 2
were looking for some signs of checks and balances within turkey, some sign that erdowan wasn't the only one making economic policy, that he might have some adviser pushing back on these ideas about interest rates, like maybe the head of the central bank. But erdowan, speaking through that very proper british interpreter, dashed that idea.
Speaker 7
Of course, our central bank is independentet le carcovera de rtmen by sure that. But the central bank can't take this independence and set aside the signals given by the president. Basically,
Speaker 2
ardoon said the central bank would have to answer to him.
Speaker 5
So you see, you will play a role in monitary policy going forward. Is that that? Is that the big change? Yes, this
Speaker 7
may make some uncomfortable, but we have to do it because it's those who rule the state who are accountable to the citizens. This
Speaker 2
was a big red flag. Modern central banks, like the fed and the european central bank, are typically independent, so they're protected from short term political pressures. Everyone
Speaker 1
was saying, nope, not in turkey. And he followed through. Over the last three years, there has been this pattern, a central bank govern will try to do the thing that economic orthodoxy says they should, they'll try to deal with inflation by raising rates. And then the office of the president issues a decree that central bank governor is gone, fired. Then a new guy comes in, and, yes, they are all guys, same thing. Eventually he gets around to hiking rates and gets fired. Turkey's gone through three central bank governors since 20 ninet. That's a lot of turnover. And
Speaker 2
then the central bank went in the opposite direction. Instead of raising rates, lowering them.
Speaker 4
If you plot the inflation rate in turkey, what we have seen in the last six months is really one of a kind. When we all expected the central bank to hi crates, we have seen these rate cuts. And that's how we have seen inflation getting out of control. That's
Speaker 2
how you see inflation over 60 %. And some say the government might be low balling those numbers. And
Speaker 1
now the turkish central bank has a big credibility problem. Economists, investors, businesses, regular people, they think the central bank is too beholden to politicians to do its most important job, control inflation. And so people expect prices to keep going up and up, and for their money to be worth less and less. This is a dangerous spot for a central bank to be in. In
Speaker 4
an economy where the central bank has good communication and works together with the markets, the central bank's main role is to guide the markets in the right direction. You just tell the markets what you are going to do, and they move in that direction because the central bank has credibility, and the market see that the path that you define for the markets make sense. But when that relationship is broken, then central bank pushes interest rates in one direction, and the markets go in the opposite direction. Like
Speaker 2
in the us, when the fed makes a little hike in interest rates, other interest rates, like mortgage rates, tend to follow. But in turkey, the trust is broken, everyone expects higher and higher inflation. And expecting inflation basically makes it come true. Because all through the economy, people start making decisions based on the belief that their money will be worth less in the very near future. Workers
Speaker 1
negotiate for higher salaries, landlords raise their rents, and consumers try to buy that new refrigerator they need now, because in a few months the price teg will be even higher. All of those actions send prices up. And
Speaker 2
at the time, with the lira losing value, people are abandoning the currency. Instead, they're buying us dollars because dollars are more stable. So the lira keeps losing ground.
Speaker 1
M ripa car says that when people start dumping the lira to buy dollars, that behavior is really hard to unwind.
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