Turkish Prime Minister Recep Tayyip Erdogan is no fan of high interest rates. He has repeatedly argued that his country’s central bank should keep real lending rates at or near zero. (A devout Muslim, he is said to draw inspiration from Islamic doctrine, which forbids interest.) Occasionally, he has gone so far as to dispute a fundamental tenet of economics, claiming that high interest rates cause inflation. He has even pinned part of the blame for his political troubles -- including mass protests last summer and an ongoing corruption scandal this winter -- on an unholy alliance of international financiers, Western governments, and the foreign media that he has dubbed, tellingly, the “interest rate lobby.”
Erdogan’s personal faith in low lending rates could be dismissed as just that -- personal -- were it not for the ways it seemed to sway Turkey's monetary policy. Up until two weeks ago, Turkey’s central bank had increased rates only three times over the past two years, reluctantly and ever so slightly. When it did so last August, by half a percentage point, a move that most analysts decried as too little and too late to offset creeping inflation, it followed up with a vow to steer clear of rate increases in the near future. It was, to many observers, a dangerous sign that the bank had forfeited its independence to indulge Erdogan’s interest rate credo and his emphasis on continued economic growth. The central bank, economist Tim Ash wrote in a note emailed to investors following the August rate hike, appeared “much more concerned about … helping the government achieve its 3 to 4 percent growth target” than about keeping the lira strong and keeping inflation at bay.
It was to the relief of many market watchers, then, that on the night of January 28 this year, despite Erdogan’s earlier insistence to the contrary, the central bank raised the overnight lending rate by about three percent.
It appeared to have no choice. Despite