As central banks around the world have been aggressively raising interest rates to combat inflation, Turkey’s central bank is taking a very different approach.
Despite inflation soaring to nearly 80%, Turkey’s central bank announced it has decided to cut its interest rate from 14% to 13%. It had been at 14% for the past seven months. Analysts had expected no rate change.
Turkish President Recep Tayyip Erdogan has pressured the bank into lowering borrowing costs in a bid to spur economic growth, investments, and exports. Erdogan has insisted that interest rate hikes cause inflation, defying established economic thinking that rate increases help to cool inflation.
Turkey’s inflation for the month of July rose by 79.6%, its highest in 24 years, as food and energy costs soared.
The Turkish lira slid about 1% after the surprise rate cut, trading at more than 18.1 to the dollar — near a record low. The lira has lost 26% of its value against the dollar this year. Five years ago, the lira traded at 3.5 to the dollar.
"With this latest interest rate cut, Turkey's fifth consecutive lowering of its repo rate, its inflation rate, at 79.6%, is second only to Venezuela, where inflation is a staggering 167%," said Caleb Silver, Editor-in-Chief of Investopedia.