The Turkish central bank is plowing ahead with more cuts to the national interest rate, even as the inflation of the Turkish lira continues to accelerate to unforeseen levels.
On Thursday, Turkey shocked markets when it announced a new interest rate cut that would reduce the benchmark to only 13 percent, after seven months in which the benchmark remained flat at 14 percent.
Falling Turkish LiraThe value of the Turkish lira has fallen by over 50 percent relative to the U.S. dollar in the past year, even as the U.S. experiences a rate of dollar inflation unseen in over four decades. Turkey now ranks as one of the countries with the highest rates of currency inflation, behind only Venezuela, Sudan, and Zimbabwe according to International Monetary Fund data.
Conventional economic thought maintains that low-interest rates encourage inflation, as higher rates for borrowing money discourage consumer spending and ensure stable prices, albeit at the expense of growth.
Erdogan’s stance has been panned.
However, the Turkish central bank has remained steadfast in its commitment to this monetary policy and has advanced the idea that inflation may be due to turn a corner in the near future.
Last month, the Turkish central bank projected that inflation would rest at 60.4 percent by the end of the year, before calming down to 19.2 percent at the end of 2023 and 8.8 percent a year later. Yet the Turkish currency has only continued to fall in the past year, and with the government doubling down on interest rate cuts many economists are becoming increasingly concerned that there will be no reversal until there is a drastic change in Ankara.