Could inflation benefit some people?
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London (CNN Business) -
Baffled by rising prices, the Bank of England on Thursday became the first major central bank to raise interest rates since the pandemic began.
The US Federal Reserve will follow in the coming months, with three rate hikes expected next year.
You may object when this occurs or because of the size of the interest rate hikes, but almost all economists agree that when prices rise rapidly, higher borrowing costs can help reduce demand and inflation.
Not in Turkey, however, where President Recep Tayyip Erdogan has repeatedly pressured the country's not-so-independent central bank to cut interest rates despite rising inflation.
And the bank is doing just that, with potentially disastrous consequences.
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: Consumer prices in Turkey soared 21.3% in the year through November.
Economists believe that inflation could rise further, with a rate of up to 30% possible over the next six to nine months.
Meanwhile, the Turkish lira is sinking.
The currency has lost more than half its value against the US dollar so far this year and is on track for its worst performance since 1995. The decline is difficult to stem because the central bank does not have significant foreign reserves.
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And life is getting even more difficult.
On Thursday, the Turkish central bank cut interest rates for the fourth consecutive month, from 15% to 14%.
"President Erdogan has continued to dictate the heavily sanitized [central bank] to test its unorthodox view that lower interest rates are needed to reduce inflation," said Jason Tuvey of Capital Economics.
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In an effort to bring some relief to suffering workers, many of whom have been quick to ditch the lira for foreign currencies, Erdogan on Thursday announced a nearly 50% increase in the country's minimum wage.
"With this increase, I believe that we have demonstrated our determination not to allow workers to be crushed by the weight of rising prices," the president said at a press conference.
The move can give Erdogan a political boost.
But higher wages are a known contributor to inflation and could make an already dire situation worse.
Other countries follow a more orthodox approach.
Russia raised interest rates by 1 percentage point on Friday to combat rising prices.
Is it generally convenient to refinance?
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Inflation