While monetary policy in the industrialized countries is essentially all about keeping interest rates at zero or lower for longer, the world of the emerging markets is much more diverse. On the one hand, interest rates here are usually still noticeably above zero, and on the other hand the Turkish central bank, the guardian of the currency, has recently raised interest rates. In the case of Turkey, this was probably also overdue, as there was a clear threat of a price hike. With inflation rates stubbornly above 10% (y/y) and most recently 11.8%, the key interest rate of 8.25% could not be sustained and even the recent increase to 10.25% should not be enough to push up prices to near the target level of 5.0%. Even stronger guns are needed to achieve this. In the universe of our currency analyses, Turkey clearly stands out with a massive failure to meet…

There are also limits for central banks. Key interest rates cannot be lowered at will, as negative interest rates increase the incentive to hoard cash and weaken lending. Tiering systems and crypto-currencies offer a way out here and can shift this limit downwards. In recent years, the central banks have increasingly expanded the monetary policy stimulus and lowered interest rates to zero percent and in some cases even into negative territory. According to the advocates of a negative key interest rate policy (NIRP), the possibility of lowering the key interest rate below the zero percent threshold strengthens the monetary policy transmission process. Compared to a „regular“ interest rate cut, the push into the negative range would allow the monetary policy impulse to unfold its effect via additional transmission channels. However, negative key rates are not a panacea and are not free of undesirable side effects. A study by Brunnermeier and…

  Despite the persistent weakness of the lira, the recent meeting of the Central Bank of Turkey ended without new decisions. In the accompanying statement, the monetary watchdogs confirmed the goal of continuing the „underlying trend of declining inflation“. However, a negative real interest rate in the 3.5% range combined with a depreciation of the local currency of almost 9% since the beginning of June against a US dollar that is not exactly bursting with strength at the moment make such lip service appear anything but credible. By exercising restraint, the Turkish central bank has missed another opportunity to regain market confidence, improve the transparency of its monetary policy and rehabilitate the official key interest rate in its steering function for the financial markets. The central bank has officially kept the one-week repo rate constant at 8.25% since May. However, for some weeks now it has been providing domestic financial…