“An experiment is being carried out and Erdogan is in command,” said Guldem Atabay, an economist at Istanbul Analytics. “Interest rates will go down as low as they can.”
The bank has cut its key rate 400 basis points, to 15%, since September, under Erdogan’s plan to prioritize exports and loans, although economists and opposition lawmakers have criticized monetary policy for consider it reckless.
With the cut of one hundred basis points, to 14%, the monetary authority decides the fourth consecutive drop since September, when rates were at 19%. The Central Bank has been under a lot of pressure from Erdogan to relax monetary policy despite the fact that inflation is already at 21.3% year-on-year, while the opposition and some economists consider that this figure does not even reflect reality anymore. .
The drop in interest rates is, according to most analysts, the factor behind the strong depreciation of the lira, which has lost 30% of its value in the last four weeks, and 45% since the beginning of the year.
According to most economists, the combination of lower rates and a weak currency tends to worsen inflation by increasing the price of imported goods, creating an inflationary spiral. However, Erdogan argues that the cut in interest rates benefits production, exports and credit.
Analysts believe that a drastic rate hike would be necessary to end inflationary dynamics and the currency’s decline in value. In fact, in autumn 2018 the rise in interest rates to 24% stabilized the lira at around 6 units per euro for almost two years.
But since then, Erdogan has decreed a change of the central bank governor three times, allegedly for opposing his guidelines to lower interest rates. In his statement Thursday, The Central Bank blamed the high inflation on “exchange rates and supply factors, such as the rise in world prices for food and agricultural goods”, relating the international inflationary dynamics to the recovery of demand after the pandemic of the covid-19.
The new rate cut “exhausts the use of the limited margin implicit in the transitory effects of supply factors,” the statement said, suggesting that there will be no further reductions in the coming months.
Turkey’s easing of monetary policy leaves the country as an outlier at a time when many other emerging nations are raising interest rates. In addition, the US Federal Reserve, the world’s most influential central bank, is also reducing its stimulus measures, something that has put emerging markets under more pressure to raise interest rates to attract investment.