Central Bank of Turkey’s Policy Interest Rate Cut to 13% from 14%

August 18, 2022

Turkey has one of the world’s highest inflation rates. Consumer prices rose 79.6% in the twelve months through July, up from inflation of 19% a year earlier and 11.8% in the year ending July 2020. Turkey also has an autocratic leader, who believes that raising interest rates is a cause of inflation, not a solution to excessive price pressures. After the Central Bank of Turkey’s policy interest rate was lifted by 200 basis points in September 2020, 475 bps in November, 200 bps in December, and 200 basis points to 19.0% in March 2021, President Erdogan had the central bank governor fired and replaced. There have been no subsequent rate hikes even as inflation soared. Instead, the rate was cut last four months of 2021 by a total of 500 basis points to 14%.

Today’s surprise further reduction of a full percentage point to 13% is the first change in 2022. A statement of explanation for today’s decision blames inflation on various and sundry external developments such as the war in Ukraine. A further complication is attributed to the widening gap between the central bank rate and bank lending rates, so the focus of officials remains on macroeconomic tools and other steps to promote liraization in the Turkish economy. These delusional arguments repeat themes expressed for years even as inflation has risen sharply further, fueled by a 54% plunge of the lira against the dollar during the past year.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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