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Russia and Turkey Take Contrasting Approaches Amid Push for Looser Monetary Policy

Russia’s central bank cut its key interest rate for a second consecutive month amid a global shift toward easier monetary policy led by the Federal Reserve.

The modest nature of the cut — to 7.25% from 7.5% — was in contrast to the shift in policy at Turkey’s central bank, where the key rate fell to 19.75% from 24% Thursday. For many economists, Turkey’s move highlighted the dangers of government interference in central bank policy deliberations.

“The contrast is very instructive,” said Sergei Guriev, chief economist at the European Bank for Reconstruction and Development, which has invested heavily in both countries. “On monetary policy, the Russian central bank has done an excellent job.”

Bank of Russia Gov. Elvira Nabiullina showed her willingness to make tough calls when she almost doubled the key interest rate overnight in December 2014 to prop up the ruble as the West met Russia’s military intervention in Ukraine with sanctions. The central bank subsequently cut interest rates, and more recent moves up and down have been much smaller.

The central bank can do little to raise growth rates in an economy that suffers from a shrinking population, low levels of investment and heavy reliance on the extraction of oil and other raw materials. However, it has ensured that growth isn’t set back by big swings in the ruble’s exchange rate and inflation, twin sources of disruption in the decades since Russia abandoned communism.

That slow but steady approach to interest rate moves contrasts starkly with the sharper swings by its Turkish equivalent.

Policy makers there tightened policy sharply in 2018 as the lira plummeted and inflation soared. Their critics say the central bank was largely responsible for those problems, having kept rates too low during a long economic boom.

“Turkish businesses are fundamentally competitive and healthy,” said Mr. Guriev. “There are many things to like about the Turkish economy. Turkey’s economy is in recession because of unorthodox monetary policy.”

While Russian President Vladimir Putin has let Ms. Nabiullina chart her own path, Turkish President Recep Tayyip Erdo an has pushed for lower interest rates and fired central bank chiefs who don’t deliver them.

“In Russia, politicians believe their economic objectives can best be achieved if the central bank and the ministry of finance are independent, whereas in Turkey, Erdogan thinks he knows best and he wants his fingerprints to be visible,” said Richard Segal, emerging-market analyst at Manulife Asset Management.

Political scrutiny of central banks has intensified since rate setters took on a bigger role in the wake of the global financial crisis.

In the U.S., President Trump has adopted an approach to the Federal Reserve that appears closer to Mr. Erdogan than Mr. Putin. He has frequently berated the Fed over the past year for raising interest rates in 2018 and leaving them unchanged so far this year. The president accuses the central bank of undermining his efforts to make the economy grow faster and of putting the U.S., which has higher borrowing costs than other developed countries, at a competitive disadvantage to the rest of the world.

With signs mounting that the world economy is slowing, the Fed is widely expected to lower interest rates for the first time in over a decade when it meets at the end of July. The European Central Bank signaled Thursday it is preparing to cut short-term interest rates for the first time since early 2016 as the economic outlook worsens.
Source: Dow Jones

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