A few weeks ago, President Erdogan of Turkey announced on the campaign trail that if he is re-elected later this summer, his first act will be to take control of interest rates from the Central Bank of Turkey. The currency markets were shocked: the Turkish lira promptly dropped by 10 per cent.
The reason is that President Erdogan’s bold proposal flies in the face of what has been for 40 years the modern consensus on the best way to conduct monetary policy. Politicians, that consensus holds, will always be tempted to prioritise popularity at the ballot box over economic stability, resulting in boom-bust cycles ultimately detrimental to growth and employment. The setting of interest rates should therefore be delegated, it says, to a technocratic central bank, which will have the political independence to take the longer-term view.
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