Cutting Rates to Fight Inflation

How Turkey's government pushed the central bank to cut interest rates even as inflation rose, based on the unorthodox view that high rates cause inflation.

Standard economics says central banks should raise interest rates to fight inflation. Turkey tried the opposite.

The unorthodox view

President Recep Tayyip Erdoğan argued that high interest rates cause inflation, calling interest rates “the mother of all evil”. He also cited religious objections to interest.

Central bank turnover

Turkey’s central bank governors were dismissed several times between 2019 and 2021.
Critics saw this as loss of independence.

Rate cuts

In late 2021, the central bank cut its policy rate from 19 percent to 14 percent despite inflation of around 20 percent and rising.

What happened

The lira fell sharply.
Inflation soared, peaking at around 85 percent in October 2022.
Real interest rates became deeply negative.

Why standard theory predicted this

Low rates encourage borrowing and spending.
Negative real rates push savers into foreign currency and goods.
A falling currency raises import prices.

The negative real rate

With inflation at 80 percent and deposit rates at 20 percent, a saver's lira savings lose about a third of their value in real terms each year.

Thinking cutting rates reduces inflation

Turkey's rate cuts coincided with soaring inflation.

Key takeaways

Turkey's leadership argued high rates cause inflation.
Central bank governors were dismissed several times.
Rates were cut in 2021 despite rising inflation.
Inflation peaked around 85 percent in 2022.