(Bloomberg) -- Look to Turkey to see the cost of political meddling with central banks, according to the Bank for International Settlements.
“You see the government undermining the autonomy of the central bank and at the same time you see the negative consequences,” BIS General Manager Agustin Carstens said in a phone interview accompanying the institution’s annual economic report. Looking at Turkey, other countries can “see what happens when the government tinkers with the autonomy.”
President Recep Tayyip Erdogan’s repeated calls for Turkey’s central bank to lower borrowing costs have unsettled investors and led to repeated bouts of currency weakness. On June 21, the Turkish leader compared himself to U.S. President Donald Trump, who’s also been critical of what he says are high U.S. interest rates, saying they’re impeding economic growth.
“It’s clear that autonomy adds and vitality to the economy,” Carstens said. “The case of Turkey validates the importance of the preserving the autonomy of the central bank.” Central banks need to “persevere” in following their goals and not to be swayed by short-term political goals of decision-makers in government, he said.
The lira has depreciated more than 8% against the dollar this year, the second-worst performer in emerging markets, and inflation was 18.7% in May, more than triple the central bank’s target. The effects from currency swings on inflation are generally larger in emerging economies, BIS said in its report released Sunday.
Erdogan’s opinions on how Turkey’s monetary policy should be revised are based on an unorthodox belief that higher interest rates lead to higher inflation. The textbook view is that central banks use higher interest rates for the opposite effect: to bring inflation down.
Turkey’s central bank says it makes decisions based solely on its official mandate of achieving price stability and refuses to comment on political debates. It has repeatedly defied Erdogan by raising interest rates, with its benchmark one-week repo rate currently set at 24%.
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