In October, the US Federal Reserve (Fed) and the European Central Bank (ECB) kept their policy interest rates unchanged as global inflation, particularly in developed countries, showed a downward trend.
The inflation rate in developed countries accelerated upward in early 2022. These Central Banks immediately started to increase their policy interest rates. They closed 2022 with an average inflation rate of 7.3 percent. Since this rate was considered high, they continued their tight monetary policy in 2023. By September 2023, the inflation rate had fallen to 3.7 percent in the US and 2.9 percent in the Euro area. Let us also note that the IMF estimates that the inflation rate in developed countries will be around 3 percent in 2024.
The source of the increase in the inflation rate in developed countries can be listed as the disruption of the supply chain after the pandemic, the increased money supply due to the 2008 and pandemic crisis, and Russia’s invasion of Ukraine. The increase in policy interest rates in these countries naturally led to an increase in interest rates in other countries. However, interest rates in developed countries never exceeded 6-7 percent.
The top 10 countries with the highest inflation rates are developing countries. As of September 2023, the country with the highest inflation rate is Venezuela with 360 percent. This country is followed by Zimbabwe with 314.5 percent, Sudan with 256.2 percent, Lebanon with 171.2 percent and Argentina with 121.7 percent. Turkey ranks sixth just behind Argentina with 61.3 percent (year-end expectation is 65 percent).
The countries in the top 10 have common characteristics. Let us list them:
- They are governed by populist governments
- Many of them faces conflicts either internally or with other countries
- Those running the country have adopted nepotism and crony capitalism.
Because of this dilemma, their monetary and fiscal policies to reduce the inflation rate are not working.
Fight with inflation needs fiscal policy as well
Turkey is also experiencing some of these problems. However, while exchange rates and the inflation rate were rising for a certain period, the CBRT’s monetary policy based on low political interest rates and the uninterrupted increase in public expenditures (the election economy and the current transfers item, which has been high for years) depleted the country’s foreign exchange reserves, caused the inflation rate to increase very rapidly and shook confidence in economic policies. Although there is an attempt to return to the Taylor rule after June, this will not be enough to bring down the inflation rate. A monetary policy without fiscal policy would topple like a table with one leg missing. Indeed, the CBRT Governor indirectly admitted this in his last press conference. She said that inflation will fall from the second half of 2024. She had to say this because there are elections ahead.