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Turkey cuts benchmark interest rate despite rampant inflation- Newshubweek

Turkey cuts benchmark interest rate despite rampant inflation
Written by Arindam

Turkey slashed its benchmark interest rate for the third consecutive month as president Recep Tayyip Erdoğan pushed ahead with a plan to bring down borrowing costs even as the country fights a powerful spell of inflation.

The country’s central bank on Thursday said it was lowering the benchmark one-week repo rate from 12 per cent to 10.5 per cent — a deeper than expected cut — even as Turkey’s official inflation rate exceeded 83 per cent in September.

Turkey’s decision on Thursday starkly contrasts with most other central banks, which have sharply boosted borrowing costs this year as they battle inflation and push back against a surging dollar. The rate cuts highlight Turkey’s approach of pursuing high rates of economic growth even at the cost of price stability.

The country’s real interest rate, an inflation-adjusted measure that is closely watched by investors, is now among the lowest in the world at minus 72 per cent.

Erdoğan, an ideological opponent of high interest rates, has said repeatedly that he wants borrowing costs to drop below 10 per cent in the months ahead.

Speaking earlier this month, he said: “As long as this brother of yours is in this position, interest rates will continue to come down with every passing day, week and month.”

The central bank indicated that it would cut rates one more time before bringing the easing cycle to a halt. 

Erdoğan is seeking to prioritise growth in the run-up to key parliamentary and presidential elections that are scheduled for June 2023. The president believes that low interest rates also play well with his political base, which includes small businesses and construction firms that rely on cheap credit.

Turkish authorities have used a raft of micromanagement tools to limit the damage to the lira. The currency is under pressure due to Turkey’s gaping current account deficit, its large foreign debt burden and a highly dollarised economy, as well as deeply negative real interest rates that deter investors from buying lira-denominated assets.

Those tools include forcing exporters to convert 40 per cent of their revenues into lira and pressuring corporates to limit their purchases of foreign currency. Still, the currency is down around 30 per cent against the dollar this year.

The lira was little changed after Thursday’s decision, at 18.59 to the dollar. 

Haluk Bürümcekçi, an Istanbul-based analyst, said the central bank had once again failed to outline any “concrete policy proposals” to combat inflation.

He said that the central bank would continue to rely on currency interventions and other measures in a bid to steady the lira and limit inflation. “These policies do not seem sustainable, but it seems that the economic management will try to maintain this approach until the elections,” he added.

Enver Erkan, chief economist at Tera Securities in Istanbul, said Turkey was serving as a “case study” for the consequences of unorthodox economic model.

In a note to clients, he said: “So far, the results of the model have been the deterioration of price stability and the worst-performing emerging currency of the year after the Argentinian peso.”

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Arindam

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