The damage to the Turkish central bank’s inflation-fighting reputation that culminated in last year’s lira crisis has been years in the making, with its credibility having been progressively eroded over a full decade, two academic studies have found.
The papers by Turkish professors, including one yet to be published that analyses currency derivative market moves before and shortly after policy changes took place, offer a rare academic critique of the country’s failure to rein in inflation.
They highlight the role played by President Tayyip Erdogan’s repeated calls for lower interest rates, which the research suggests have harmed the bank.
Last year as the Turkish lira at its worst shed half its value against the dollar and inflation hit a 15-year high above 25%. Even though the central bank hiked rates to 24% in September, many investors and economists saw the tightening as too little too late as the economy tipped into recession.
On Wednesday, the bank held rates steady again but set the stage for a cut by signalling more confidence that inflation, which remains above 18%, was headed lower.
Erdogan, a self-described “enemy of interest rates” who has urged more stimulative monetary policies for years, publicly opposed last year’s rate hikes.
The public pressure from him and others to ease policy in the face of rising inflation in recent years has had a marked decrease in the probability that the central bank would hike rates, found one of the papers, published in August by sisters Selva Demiralp, a former U.S. Federal Reserve economist now at Koc University, and Seda Demiralp of Isik University.