Turkiye’s central bank on Thursday cut its policy rate for the second straight month despite an annual inflation rate that has reached 80% and is still moving higher.
The central bank said it was cutting its one-week repo rate to 12% from 13% and blamed skyrocketing consumer prices on external factors such as the global jump in the cost of energy and food caused by Russia’s invasion of Ukraine.
The decision highlights Turkish policymakers’ strong focus on economic growth nine months before a general election.
Turkey has gone the opposite direction of other central banks worldwide which have raised their rates to combat inflation, with the US Federal Reserve and European peers announcing hefty hikes this week.
The Turkish lira is under pressure, and it touched a new historic low of 18.41 against the dollar before recovering some its losses after the announcement. Official data show Turkey’s industrial production and retail sales both starting to slow.
“Since the beginning of July, leading indicators have been pointing to a slowdown in growth due to the weakening foreign demand,” the central bank said. “Leading indicators for the third quarter continue pointing to loss of momentum in economic activity due to the decreasing foreign demand.”
President Recep Tayyip Erdogan has championed economic growth at all cost.
He also rejects conventional economics and believes that inflation can be brought under control by cutting interest rates.
“I am an economist. Inflation is not an economic danger that cannot be overcome,” Erdogan told US television this week.
“Currently, there are countries which feel threatened by inflation of even eight or nine percent. We have 80%,” he said. “And in my country, the shelves are not empty in the markets.”
Turkiye’s inflation rate is now the highest since 1998.
Additional deals with Russia have helped shore up Turkiye’s dwindling foreign currency reserves and potentially given enough breathing room to ride out the economic problems until June.
Analysts at Fitch Ratings said they expect the central bank to end its era of unconventional economics and start raising rates after the election.
But economists believe any rate hike would need to be dramatic to have any meaningful effect.
The logo of Turkiye’s central bank (TCMB) at the entrance to its headquarters in Ankara (file). The central bank said it was cutting its one-week repo rate to 12% from 13% and blamed skyrocketing consumer prices on external factors such as the global jump in the cost of energy and food caused by Russia’s invasion of Ukraine.