Continues to slash interest rates as the nation battles
Key Points
The crucial one-week repo rate was reduced by 100 basis points, from 13% to 12%, by the nation's monetary regulators.
The rate of inflation in Turkey accelerated for the fifteenth straight month in August, reaching 80.2%, the highest level in 24 years.
The key interest rate was slashed by Turkey's central bank on Thursday, shocking the markets despite the nation's inflation rising above 80%.
The crucial one-week repurchase rate was reduced by 100 basis points, from 13% to 12%, by the nation's monetary regulators. The Turkish inflation rate was 80.2% in August, the highest level in 24 years and a quickening trend for 15 straight months.
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| Russian travel to Europe fell sharply over the summer, but increased in a number of other places, notably Turkey (here). |
A currency crisis was sparked by Turkey's rate cuts, which were also 100 basis points in August and 500 basis points over time at the end of 2021.
According to Reuters, the Central Bank of the Republic of Turkey stated in a statement that it has "considered that the modified level of policy is acceptable under the current outlook." It stated that the reduction was required due to slowing growth and demand as well as "escalating geopolitical risk."
According to Reuters, it stated that as a result of the actions taken, markets should prepare for the "disinflation process to commence."
Investors and economists have long been baffled by the policy direction, which they attribute to political pressure from Turkish President Recep Tayyip Erdogan, who has long railed against interest rates and defied economic conventional wisdom by arguing that lowering rates is the best way to reduce inflation.
Turkey's currency, the lira, has been in a multiyear downturn as a result of the months-long drive to consistently decrease rates while its trade and current account deficits grow and its foreign exchange reserves dwindle.
In comparison to the dollar, the lira has lost more than 27% of its value this year alone and 80% over the last five years. After the bank announced its rate decision, the exchange rate fell by a quarter of a percentage point to a record low of 18.379 to the dollar.
For the lira, more peril lies ahead.
Many economists believe that the lira will continue to decline. By March 2023, London-based Capital Economics predicts a decline to 24 against the US dollar.
According to Liam Peach, the company's senior emerging markets economist, "room for additional easing is becoming increasingly restricted because of the pressure this is putting on the lira and real rates." Turkey's current account deficit is so big that it has to rely on capital inflows from abroad to pay for it. The Turkish central bank is unable to intervene due to the country's extremely low foreign exchange reserves, he claimed.
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| On Monday, August 29, 2022, a currency exchange office in Istanbul, Turkey, displays exchange rate data on an electronic board. |
Peach cautioned that at some time trust will plummet to the point where those crucial inflows are likely to stop. "Cutting interest rates further makes it harder for Turkey to attract those capital flows," he said.
Erdogan, on the other hand, is still upbeat and believes that inflation will decline by year's end. "Inflation is not a crippling financial danger. I am an economist," the president declared in a Tuesday interview. Erdogan is not a trained economist.
As the cost of basic necessities rises and the world's price inflation for commodities and energy has been significantly exacerbated by Russia's protracted conflict in Ukraine, Turks will likely continue to struggle.
Erik Meyersson, a senior economist at Handelsbanken Capital Markets in Stockholm, claimed that ultimately, "the most pressing problem is one of domestic economic mismanagement by the current regime."
Election preparation?
Erdogan's decisions, in the opinion of Meyersson and other observers, are mostly influenced by the upcoming elections.
A disproportionate amount of attention will be paid to sustaining short-term economic growth in light of the impending elections, he said, pushing inflation and the lira even higher. The creeping suffocation of the nation's economic potential is the Turkish government's more serious failing than its seeming accomplishment in preventing a worsening of the financial crisis.
According to Can Selcuki, managing director at Istanbul Economics Research & Consultancy, Erdogan's administration has also started a number of spending initiatives ahead of the elections, including attempts to reduce electricity rates and a sizable social housing project.
Selcuki referred to Erdogan's regular meetings with Russian President Vladimir Putin and said, "I think you're going to see inflation increase more, but what the government had been counting on would be a deal with Russia to get cheaper gas to at least help the current account deficit on the energy side."
However, he added, "I believe the latest developments also put that accord in jeopardy, so I believe we will see greater depreciation of the lira and rising inflation."
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