Turkish central bank raises interest rate to 42.5% to combat high inflation

Businesses downsize the workforce either (1) because they are in difficulty already, (2) or because they expect a contraction in their business and want to be better prepared, (3) or because they now doubt that their earlier bold plans will work out.

Raising interest rates is often done too late, too much, and too long - which then starts an economic contraction. A "soft landing" is rare so some businesses take measures in advance of that contraction.

But normally interest rate increases are because the economy is expanding too fast (which causes price inflation) - normally that's a low unemployement time. Business response will raise unemployment a little but not much. What WOULD raise unemployement significantly is a contraction because interest rates stayed high too long. An oil shock is a different kind of beast: you get price inflation even though there wasn't excess growth.

Still... 42% is a signal things are out of control. At that stage are businesses still borrowing at all? So will this increase have much effect?

Tbf, Erdogan's Islam excuse was bullshit. He kept interest rates low because his family has a controlling interest in construction companies in Turkiye.

The company that built Istanbul Airport and runs IGA are run by relatives for example [1] and instigated their conflict with the UAE after Emaar "stole" the Bucharest (edit: Belgrade) Waterfront redevelopment from them [2]

Turkiye has so much potential. If only the political class wasn't so shit. It can actually become a first world country in 10-15 years if an IMF regime is forced on them.

[0] - https://www.bloomberg.com/news/articles/2021-12-19/turkey-s-...

[1] - https://mapa.group/our-projects/

[2] - Met a businessperson working on that tender at IST. Good conversation. I'll never say no to an excuse to expense Yeni Raki (edit: Tekirdag Gold).

It does this by raising the interest rate charged on newly originated loans (why loan at less than the central rate you could get for depositing?), which results in fewer loans (low-return opportunities no longer feasible to finance), which decreases the effective money multiple (due to fractional reserves, availableToLoan:deposited ratio).

On the one hand, this supports the value per currency unit, as less currency chasing same number of goods.

On the other hand, it can decrease net economic activity and blunt its own intent, as you note.

At the end of the day though... it's extremely difficult to run a functioning economy with persistently high inflation. See also: Argentina. So, paraphrasing the new Argentinian president's words, 'This needs measures that will make things worse before it gets better.'

At a fundamental level, the target is consumption and the aim is to reduce it. Inflation is when there’s more money but lesser availability of goods and services that people want. So you either have to increase the production of (or import of) goods and services or reduce the amount of money in circulation. Central banks can only do the latter. The former is the responsibility of the executive and legislature to do with policy measures (short term, medium term, long term) on local and well as the international trade fronts.

Coming back to unemployment, it will likely rise. It will have a spiraling effect on other things (people going broke, loans being defaulted, etc.).

If you’ve read about all the developed countries targeting high inflation, and in particular what the U.S. Fed has been doing, there’s been a lot of talk about a “smooth landing”, which implies that the interest rate hikes will gradually bring down inflation without causing a big decline in GDP growth and related effects. This is mostly a fantasy because in reality nobody has figured out how to get other people, i.e., an entire population, to do something in unison.

While interest rates control ease of access to money, central banks can control the amount of money available through various mechanisms (liquidity control in banks, reserve requirements, etc.). Interest rate increases require time to show up in their effects (several months or quarters). Other measures can have a quicker impact. Businesses, especially larger ones, will have access to bind their effective interest rate to lower values for longer. So these changes won’t show up uniformly everywhere.

All said and done, central banks are typically (IMO) powerless in handling inflation or deflation. Without other policy decisions and policy actions (local and international) by the government, there’s not a lot that central banks can do without inflicting too much damage and getting into a whiplash reaction when things spike out of control.

Macedonia will never be North Macedonia! Greece, NATO, and EU ascension be damned!

Rename Eswatini to Swaziland!

Zaire shall live on!

/s

Why the double standard for Turkiye? It's just pure racism.