“We are lowering the rates. Don’t expect anything else from me. As a Muslim, I will continue to do what my religion commands me to do.
Against the monetarist dota which believes that the increase in the interest rate lowers inflation, Recep Tayyip Erdogan rather advocates the opposite. Eleven months before the crucial presidential elections, the Turkish president, who came to power in 2022, pushed the Turkish Central Bank to lower its key rate from 14 to 13% while inflation is close to 80%, its highest in 24 years. . Monetarist theory says that by increasing the interest rate (rent of money), the money supply in circulation is reduced and therefore investment in the economy and, ultimately, this increases unemployment. By raising the interest rate, banks reduce their loans, economic agents consume less. The demand for goods and services decreases and slows down the price increase. So many theories in vogue in the mid-1970s but undermined by a current context where inflation is mainly fueled by rising energy prices and shortages of basic products.
“We are therefore faced more with a crisis of supply than that of demand”, we believe to read in the decisions of the Turkish president who has dismissed three central bank governors since 2018 each time they have dared to raise the interest rate. Between August and December 2021, the Turkish key rate was lowered by points, from 19 to 14 points at the instigation of a president convinced that the only virtue of increasing interest rates is to promote unemployment. A tripping inflicted on the dominant theory which caused the Turkish lira to fall by 44% in 2021 once morest the dollar. The Turkish currency continues its downward spiral, having fallen by 25% since January 2022, despite the mobilization of a good part of the country’s foreign exchange reserve to support it.
The Turkish president had justified in December 2021 his choice to keep lower rates in order to limit the usury prohibited by the Muslim religion: “We are lowering the rates. Don’t expect anything else from me. As a Muslim, I will continue to do what my religion commands me to do. » It remains to be seen whether inflation or Erdogan will win this showdown.
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