Emerging market countries and currencies had a good year in 2017. But starting in January, these markets have experienced a sharp correction due to higher U.S. interest rates and the potential threat of trade tariffs or increased trade friction.
That's starting to stir up some problems.
The accepted wisdom is that central banks should be independent from political interference, and that applies to almost all G7, G20 and emerging market countries. This policy allows central banks to remain focused on their primary jobs: Keeping inflation in check, keeping the economy on track regardless of which political party is in power and taking action based on the country's best interest rather than on short-term politics.
Unfortunately, this ideal is not always carried out.
Take a look at Turkey. The Turkish lira (TRY) has been in free fall, collapsing more than 15 percent in the past three months and reaching a record low against the U.S. dollar.
On the political side, Turkish President Recep Erdogan recently decided to call a snap election for June 24 in an effort to continue consolidating his power. Ostensibly in order to ensure his electability, Erdogan is pointing the finger at Turkey's central bank over the rising inflationary pressures. His rhetoric is even beginning to cross the line separating central banks and politics: He recently stated that if elected, as part of his new role, he would influence monetary policy for the good of the country.
The worrisome fact is that President Erdogan is blaming his country's continuing higher inflationary pressures on the fact that the central bank is raising interest rates, which causes inflation to spike. He is advocating for lowering interest rates to fight inflation.
Needless to say, this is absolutely contrary to basic economic principles. And the market has not taken kindly to his proposed intervention, with the Turkish lira falling 2 to 3 percent since last Friday.
Our View: Turkey's economic woes are not simply the result of central bank policies. There are a combination of external factors at play, including rising U.S. interest rates and commodity prices and a worsening current account deficit. The reason the TRY has fallen reflects global investors' sentiment that the market wants to see economists fix the economy - not politicians, since the latter may be prone to making the wrong decisions and not addressing the root of the economic problem.
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