Status: 10/20/2022 3:02 p.m
The Turkish central bank is continuing its controversial interest rate cuts – despite the enormously high inflation. And President Erdogan has announced further easing of monetary policy.
While the US Federal Reserve (Fed) or the European Central Bank (ECB) are currently raising interest rates in the fight against inflation, the Turkish central bank is continuing with its unorthodox monetary policy. Despite an extremely high inflation of more than 80 percent, it lowers its key interest rate again.
The monetary authorities in Turkey announced today that the important interest rate would be reduced from twelve to 10.5 percent. At the next meeting, interest rates could fall by a similar amount, thus continuing the easing of monetary policy that was introduced a good year ago. At that time, the interest rate was still 19 percent.
Inflation of 83 percent – lira under pressure
Inflation in Turkey rose to around 83 percent in September, the highest since 1998. Analysts assume that inflation will continue to rise sharply in the coming months. From the news agency Reuters Economists surveyed see the inflation rate at the end of the year at 72.5 percent and at the end of 2023 at 40.5 percent.
Actually, according to economic doctrine, significant interest rate increases would be the order of the day in order to cool down economic activity and thus get inflation under control and make the lira more attractive again. The currency is currently trading near record lows against the US dollar. It has lost more than 44 percent against the dollar in the past year alone, and another 29 percent so far this year.
The weak lira makes import prices more expensive and also drives inflation. In addition, there are ongoing problems in the international supply chains, which make preliminary products more expensive. In addition, the prices of energy and raw materials are rising, mainly because of the Russian war against Ukraine.
Cheaper credit should boost exports
However, President Recep Tayyip Erdogan wants to ensure that interest rates continue to be cut as long as he is in power. “As long as your brother is in this position, interest rates will fall every day, every week, every month,” Erdogan said at a recent event in the western province of Balikesir. He wants to use cheap credit to boost production and exports, which in turn should create more employment.
In 2021, the Turkish economy grew 11 percent, the fastest it has been in a decade. However, due to high inflation and the negative consequences of the Ukraine war, the economy is facing a difficult year, for example for tourism. Economists only expect Turkey to grow by around 3.5 percent this year.