Turkish central bank makes huge rate cut amid 83% inflation

Oct 20, 2022, 4:32 AM | Updated: 3:14 pm
FILE - A screen displays exchange rates in a currency exchange shop in a commercial street in Istan...

FILE - A screen displays exchange rates in a currency exchange shop in a commercial street in Istanbul, Turkey, Thursday, April 14, 2022. The Central Bank of the Republic of Turkey has slashed interest rates for the third month in a row on Thursday, Oct. 20, 2022, making its biggest drop this year. (AP Photo/Francisco Seco, File)

(AP Photo/Francisco Seco, File)

ISTANBUL (AP) — Turkey’s central bank has slashed interest rates for the third month in a row, making its biggest drop this year despite sky-high inflation that is squeezing people’s finances as it follows President Recep Tayyip Erdogan’s unorthodox economic views.

The Central Bank of the Republic of Turkey on Thursday lowered the benchmark rate by a massive 1.5 percentage points, to 10.5%. The bank cut rates by 1 percentage point each in August and September. The bank had kept the rate at 14% for eight months, pausing a previous round of cuts that triggered a currency crisis.

“It is critically important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment” amid uncertainties in global growth and geopolitical risks, the Central Bank said in a statement explaining its latest decision.

The statement signaled that the bank would take a “similar step” in November, which would bring the policy rate to single digits.

Turkey has followed Erdogan’s belief that high borrowing costs cause high inflation, though traditional economic thinking says that raising rates is the antidote to inflation. The country saw inflation hit a staggering 83.45% in official September statistics, making it difficult for people to afford to buy necessities.

Central banks around the world have taken the opposite route of Turkey, rapidly raising interest rates to clamp down on soaring consumer prices. The 19-country area that uses the euro currency saw inflation reach a record 9.9% last month, and the European Central Bank has been enacting big rate hikes to combat it, with another expected next week.

The Turkish lira has lost some 28% of its value against the U.S. dollar since the beginning of the year — on top of taking an even worse battering in 2021. The dollar, on the other hand, has hit a historic high as the U.S. Federal Reserve tightens financial conditions.

As Erdogan gears up for presidential and parliamentary elections next June, he is counting on lower borrowing costs to propel the economy. He has expressed his wish that interest rates go down to single digits and a belief that the lira would appreciate in value.

Erdogan said this month that as long as he’s president, “interest rates will continue to go down every passing day, every passing week, every passing month. No one should give us advice about this subject.”

He said investments and growth can only take place under low interest rates and encouraged businesses to borrow from state banks.

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Turkish central bank makes huge rate cut amid 83% inflation