Interest rate as an economic policy tool

Dünya Executive - - COMMENTARY - Taner BERKSOY Columnist

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.

Newspapers in English

Newspapers from Turkey

© PressReader. All rights reserved.