Tomorrow, the Turkish Central Bank will announce its decision for its policy rate, in its final session before the upcoming local elections in March 31st. The markets and economists agree that a pause in the rate hikes is most likely. Elections have long played a significanty role in determining Turkish monetary policy, a consequence of low central bank independence. This has been seen many times in the last century, going back to the 70s and 80s. Therefore, 'Election Economics' has been very comon in Turkey, like many countries which lack strong, independent Central Banks.
Policymakers face a short term trade-off between unemployment and inflation. This was first observed by William Phillips, after whom the famous Phillips curve, showing the negative short-run relationship between inflation and employment, was named. As policymakers aim to reduce inflation, they reduce demand in the economy by imcreasing policy rates. This leads to a lower level of economic activity, hence lower incomes and higher unemployment. The relative costs of inflation and unemployment often depend on many contextual factors, but the consensus is that a low, stable rate of inflation ensures a health economy in the long run. Thus, many central banks such as the Fed, ECB or Bank of England have adpoted inflation targeting, aiming to keep inflation at 2%.
The Turkish Central Bank on the other hand, still faces some pressure from the government, and this was one reason that they are expected to hold rates steady today. Additional monetary tightening is expected from the TCMB after the local elections on March 31st. This is because the government does not want a lower level of demand an income in the economy before an election, even though it most likely is beneficial in the long-run. We have seen this with the presidential elections last year as the Central Bank lowered rates multiple times before the election to boost demand.
Therefore, short-term thinking and election economics has contributed to skyrocketing inflation and diminishing purchasing power that led to the real value of Turkish people's income to diminish and left many in a challenging situtation as millions struggle due to a cost of living crisis. The great deal of academic research shows that higher central bank independence leads to both a lower level of inflation and a higher level of employment, and this type of long-term thinking, unbiased by political objectives, is what the Turkish economy most needs.
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