Turkish central bank cuts key interest rate more radically than expected

Released on 21.10. 2021

  • Despite the high inflation rate, the Turkish central bank has drastically reduced its key interest rate. Photo: Karl-Josef Hildenbrand

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The Turkish central bank has lowered the key interest rate despite the high inflation rate. Economists agree that the current situation speaks more for interest rate hikes.

Ankara (dpa) – Despite a very high inflation rate, the Turkish central bank has drastically reduced its key interest rate. It is obviously giving pressure to President Recep Tayyip Erdogan.

Contrary to popular belief, he believes that he can boost the country’s economy, which is suffering from high inflation, with lower interest rates. As the central bank announced in Ankara on Thursday, the key interest rate will increase by 2.0 percentage points to 16, 0 percent reduced. Economists had only expected on average a decrease to 16 percent.

Lira at record low

The Turkish lira came under considerable pressure and fell to record lows against the US dollar and the euro. The Turkish lira has lost more than 19 percent against the dollar this year. For the first time, the euro rose to more than 11 Lira. The prices of Turkish government bonds came under severe pressure. The Turkish stock markets turned into the red.

After the interest rate cut, the key interest rate is even more clearly below the high inflation rate. This had in September at 19, 58 percent. This means that the real interest rate, i.e. the base rate minus inflation, is negative.

Economists agree that the current situation tends to suggest interest rate hikes. Investing in Turkish assets is now becoming even less attractive to investors. This is also putting pressure on the Turkish currency. The weak lira is also fueling inflation as imported goods are becoming more expensive.

President Erdogan recently fired three central bankers whose monetary policy he did not agree with. The current central bank chief Sahap Kavcioglu has only been in office since March after his predecessor Naci Agbal was dismissed for raising interest rates. Kavcioglu is now the fourth head of the central bank since 2019. All of his predecessors had ultimately fallen out of favor because they did not support Erdogan’s preferred course of a loose monetary policy.

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