tutor2u | Monetary Policy - Different Approaches to Tackling Inflation

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Monetary Policy - Different Approaches to Tackling Inflation

Graham Watson

26th November 2021

It's been an interesting week for monetary policy across the world.

Turkey is looking to tackle rising inflation by lowering interest rates, but South Korea and New Zealand are adopting the more orthodox strategy of tightening monetary policy with inflation predicted to go above target and pose a threat to the post-pandemic recovery.

Which is the right strategy? Only time will tell. Or rather - I think we already know - but you might still query whether raising interest rates is appropriate if you're dealing with cost-push inflation.

The Turkish lira's on the slide again, with President Erdogan keen to blame external agents for the fact that the currency has declined in the value by 40% in the past year.

As a result, inflation has surged - and the monetary response has been unorthodox, with interest rates having been cut by 4% to 15% in the past year.

The consensus view is that inflation is set to rise further, and I hope you might be able to explain why a depreciating currency would have an inflationary effect.

The FT has this article on what the collapsing lira might mean for the Turkish economy.

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