ISTANBUL – Turkey’s central bank today stunned the markets by lowering its main interest rate even as inflation soared to 24-year high and looks set to climb further.
The central bank cited the “weakening effects of geopolitical risks” as it lowered its one-week repo auction rate to 13% from 14%.
“Just insane – with inflation at 80% and rising,” BlueBay Asset Management economist Timothy Ash remarked in an emailed comment.
“I don’t think anyone expected this.”
The Turkish lira lost 1% of its value against the US dollar within moments of the announcement.
Turkey’s monetary policy decision contradicts the approach pursued by most other governments as they try to combat the spike in consumer prices caused by Russia’s invasion of Ukraine.
The war has sent food and energy prices soaring and forced central banks to raise borrowing costs, even as economic growth remains anaemic.
But Turkish President Recep Tayyip Erdogan subscribes to the unorthodox belief that high interest rates cause inflation rather than rein it in.
He has fired three central bank governors since 2019 who have tried to pursue a more conventional economic course.
The Turkish government has adopted a series of alternative measures to combat inflation which most economists dismiss as either insufficient or too complex and expensive to work.
These include limiting bank lending and offering state guarantees to ensure that Turks’ deposits do not lose too much value over time.
It has also dug in deeply into its foreign currency reserves to try and prop up the lira’s exchange rate. – AFP, August 18, 2022
