Since last fall, the central bank has lowered its key interest rate from 19 to 12 percent.
(Photo: Reuters)
Ankara Despite the inflation getting out of hand, the Turkish central bank has surprisingly lowered its key interest rate. The key monetary policy rate will be reduced by a full point from 13 percent to 12 percent, as the monetary authorities announced on Thursday. The reason given was that growth must be supported in view of the difficult framework conditions.
The economy continued to lose momentum in the current summer quarter due to weaker foreign demand. Turkey’s national currency reacted immediately to the unexpected move, with the lira slipping to a record low of 18.42 to the dollar.
Inflation has skyrocketed lately. The inflation rate reached 80.21 percent in August, the highest level since 1998. According to the central bank’s forecast so far, the peak will not be reached until autumn, with inflation rates of almost 90 percent. The main reason for this development is the consequences of the Russian war against Ukraine, which has made many raw materials significantly more expensive.
However, rising inflation is also closely linked to the weakening lira: the national currency lost 44 percent of its value against the dollar last year, and more than a quarter so far this year.
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The reason for this, in turn, is that the central bank has been gradually lowering its key interest rate from 19 to currently 12 percent since last autumn, although economic textbooks actually recommend interest rate increases when prices are rising sharply. Falling interest rates make a currency less attractive to investors. The weak lira, in turn, makes imports more expensive, on which Turkey, which has few natural resources, is dependent.
>> Read here: The week of the big jumps in interest rates
In such a situation, loosening the interest rate reins contradicts conventional economic doctrine. Such an unorthodox approach is supported by Turkish President Recep Tayyip Erdogan, who describes himself as an enemy of interest rates.
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