Turkey’s central bank stunned markets on Thursday by cutting its main interest rate, even as inflation rose to a 24-year high and is expected to rise further.
The central bank said “recession is increasingly viewed as an inevitable risk factor” as it cut its one-week repo auction rate to 13% from 14%.
“Just insane – with inflation at 80 percent and rising,” noted Timothy Ash, economist at BlueBay Asset Management, in an emailed comment.
“I don’t think anyone expected that.”
The Turkish lira lost 1 percent of its value against the dollar within moments of the announcement.
Turkey’s monetary policy decision contradicts the approach most other countries are taking when trying to combat the rise in consumer prices caused by the Russian invasion of Ukraine.
The war has pushed up food and energy prices and forced central banks to raise the cost of borrowing — even if economic growth remains anemic.
But Turkish President Recep Tayyip Erdogan holds the unorthodox belief that high interest rates are more likely to cause inflation than to contain it.
He has fired three central bank governors since 2019 who have attempted to pursue a more conventional economic course.
– Elective Focus on Growth –
Adjusted for inflation, Turkey now has a real interest rate of minus 66.6 percent.
This is forcing businesses and ordinary people to spend as much as possible before their lira depreciates even more with each passing month.
Turkey’s approach has spurred economic growth, which Erdogan hopes can help him secure a third decade in power in parliamentary elections scheduled for next June.
But it has been accompanied by a sharp depreciation of the lira, which has eroded living standards and brought the financial sector to the brink of crisis.
The Turkish government has put in place a number of alternative measures to combat inflation, which most economists dismiss as either insufficient or too complex and expensive to implement.
These include limiting bank lending and offering state guarantees to ensure that Turkish deposits do not depreciate too much over time.
It has also dug deep into its foreign exchange reserves to try to prop up the lira’s exchange rate.
These interventions have made Turkey increasingly dependent on deals with petrodollar-rich nations like Russia and Ankara’s one-time rivals in the Middle East.
Turkey this month reported a large surge in its hard currency holdings, which the finance minister linked to a money transfer from an unnamed foreign country.
According to media reports, Russia’s state-owned nuclear company Rosatom has transferred billions of dollars to build Turkey’s first nuclear power plant.
The central bank on Thursday pledged to advance its “liraisation” strategy, which aims to reduce the use of foreign currencies.
It also emphasized its clear focus on economic growth.
“It is important that financial conditions remain supportive to maintain the growth momentum in industrial production and the positive trend in employment,” it said.
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