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Wednesday, October 5, 2022
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Turkey Lowers Interest Rate Even as Inflation Soars

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Turkish President Tayyip Erdogan arrives for a NATO summit in Madrid, Spain June 29, 2022. | Image by CNBC

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Turkey’s central bank scratched its benchmark interest rate by one percentage point on Thursday. This unanticipated change sent the lira lower against the U.S. dollar as its inflation rate approached 80%.

The Central Bank of the Republic of Turkey said its rate-cut decision has seen “some loss of momentum in economic activity” and that a disinflationary process will begin soon, CNBC reports. The benchmark rate was cut from 14% to 13%.

The dollar gained ground against the Turkish lira, rising as much as 0.9% to 18.1185%, leaving the lira near a record low against the greenback.

The Monetary Policy Committee, led by Governor Sahap Kavcioglu, decided that inflation stood at 79.6% in the 12 months to July, partly due to rising energy costs. Energy prices worldwide have risen this year as a result of Russia’s invasion of Ukraine, reports Protohema.

“The Committee expects disinflation process to start on the back of measures taken and decisively implemented for strengthening sustainable price and financial stability along with the resolution of the ongoing regional conflict,” the central bank said, according to Markets Business Insider.

Recep Tayyip Erdogan, the Turkish President, has adamantly opposed rate increases and has pressed the central bank to keep interest rates low. However, a weakening lira could exacerbate Turkey’s inflation by raising the cost of imports, especially given the country’s reliance on foreign energy products.

Meanwhile, Russian crude imports have increased at ports in Turkey and other Mediterranean countries, reaching multi-week highs at the beginning of this month, Markets Insider reports.

“It is important that financial conditions remain supportive of preserving the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk,” said the central bank, Markets Business Insider reports.

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