Interest rate as an economic policy tool
Interest is a versatile and very effective economic policy variable. Having so many functions makes interest rates attractive. This attractiveness spurs many to get involved with interest rates. Politicians steering the economy are a primary example. Regardless of their geography, all politicians show a will to define interest rates. They may have several outcomes in mind but the basic instinct is to manage the economy and to provide a benefit to some. So, politicians tend to use interest rates in line with their own political needs.
But at this point in history, the power to use interest rates as a policy tool is exclusively given to monetary authorities, in other words the central banks.
The theory is that central banks are the only authorities with enough economic data to set interest rate policy. This is the generally accepted formation in today’s world. But that does not necessarily mean that a central bank is totally disconnected from politics and can thus make purely objective decisions. This is not the case in practice anyway. The fundamental economic preferences and goals of central banks are given by the political authority. It is the central bank that decides how to reach those goals and which measures to use. If there is a deviation from those goals, the central bank must answer to the political authority. This framework determines the independence of central banks.
In some cases, it is acceptable for the political authority to determine the interest rate at its own preferred level. After that point, the interest rate becomes a political-ide- ological product of choice rather than a technical tool. This tendency is more common than it seems. Almost every society tries it at some point. And such initiatives are very common in Turkey.
In fact, until recently, it was not even possible to talk about the independence of the Central Bank. The lack of independence means that the political authority can use the resources of the bank and can influence the bank’s decisions. In this case, the politicians use the interest rate as a tool of its general policy mix.