So What Happens When A Politician Meddles With a Central Bank?

Tuesday, July 24, 2018

So What Happens When A Politician Meddles With a Central Bank?

So what stands to happen when a politician meddles with his nation’s central bank? Well, Turkey is providing us with a 21st Century test case.

From The Economist this morning:

Watch with interest: Turkey

The central bank decides today whether to raise interest rates. With inflation hitting a 14-year high the choice should be straightforward. But will President Recep Tayyip Erdogan, who recently awarded himself vast new powers, countenance another increase? Despite signs the economy is overheating, Mr Erdogan wants cheap credit to fuel growth. He calls interest the “mother of all evils” and adheres to the unorthodox theory that low borrowing costs reduce inflation. The lira tumbled when he installed his taciturn son-in-law, Berat Albayrak, as finance minister. But faced with a looming currency crisis, the president has acquiesced to raising the benchmark repo rate by 9.75 percentage points since May. Traders want more and Mr Albayrak pledges not to pick fights with the market. (Perhaps he’ll even talk the president around from his unconventional ideas.) Then again Mr Erdogan promised to take control of the central bank before his re-election last month. Investors can’t say they weren’t warned.

Well, they (he, Erdogan, actually) didn’t raise Turkey’s benchmark rate, but my — with Turkey’s present inflation rate — how they (he) absolutely should have!

Here’s how Turkey’s stock market responded:

Marty Mazorra CFP®, ChFC®

Founder & Co-CIO

is the author of "Making Lemonade: A Bright View on Investing, on Financial Markets and on the Economy" and "Leaving Liberty?: Essays on Politics and Free Market Thinking".

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