Turkey cuts benchmark interest rate again, lira dips to historic low

Turkey’s central bank cut the benchmark interest rate by another 100 basis points despite soaring inflation, sending the weakening national currency to a new historic low against the US dollar.

The rate has now decreased from 15 per cent to 14 per cent, prompting the to lose as much as 6.2 pe rcent against the dollar to trade at 15.72 liras per dollar, reports Xinhua news agency.

“Cumulative impact of the recent policy decisions will be monitored in the first quarter of 2022 and during this period, all aspects of the policy framework will be reassessed in order to create a foundation for a sustainable price stability,” the central bank said in a statement on Thursday.

The Turkish central bank has lowered the rate by 400 basis points since August to correspond to President Recep Tayyip Erdogan’s belief that higher interest rates result in higher prices.

The country’s annual inflation rose to 21.31 per cent in November, the highest level in more than three years, as prices continued to climb, clouding consumer outlook in the country.

In the past two weeks, in order to counter the depreciation of the lira, the central bank sold off dollars in the foreign exchange markets for the first time in seven years, trying in vain to stabilize the currency at about 14 per dollar.

The embattled currency has lost half of its value against the greenback in 2021, with a crash in November.

Experts commented that the fresh rate cut doesn’t come as a surprise given the unconventionality of the government’s monetary policy.

“Under normal circumstances, although the traditional monetary policy and economic approach requires policy tightening, we observe that this is not the demand and target of the government at the point of the new economic perspective,” Enver Erkan, chief economist at Istanbul’s Tera Securities, said in a note to investors.

Erkan warned that a further cut in policy rates and a further increase in inflation in the coming months will bring negative real interest rates to extraordinary levels.

It has become difficult to predict the lira’s levels in the months to come, meaning the high volatility of the currency may continue in 2022, he added.

Responding to the possible displeasure at his economic policies, President Erdogan said last week that Turks should be patient and trust his government’s “new economic model”, under which he has prioritized economic growth driven by low interest rates.

He called on millions of citizens who bought dollars, euros or gold to protect their savings from soaring inflation by investing in the

Erdogan, who offered strong growth and relative prosperity to in his 19-year rule until a currency crisis in 2018, has openly declared his dislike of high interest rates.

On December 1, he fired his finance minister Lutfi Elvan who had only been in office for a year and replaced him with his deputy Nureddin Nebati.

The growth rate of the Turkish is impressive despite the currency devaluation, partly because foreign exporters and investors have been benefiting from the weakening lira.

According to the Turkish Statistical Institute, the country’s grew by 21.7 per cent in the second quarter of 2021 and Erdogan expected a 10 per cent growth for the overall year.

But this hasn’t led to the citizens gaining more purchasing power as wages have mostly been stable, leaving consumers struggling with sky-high prices of staple food items and utilities in the import-reliant country.

“The outlook doesn’t look good, as all the price increases are felt by not only low income people but also the middle class,” Sefik Durmaz, a bank employee, told Xinhua.




(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)