Bank cuts rates despite soaring inflation -

Bank cuts rates despite soaring inflation

Central banks worldwide have been hiking interest rates over recent months due to soaring inflation. However, the Central Bank of the Republic of Turkey (CBRT) has sent shockwaves through markets by going in the opposite direction and slashing its base rate.

Despite inflation of close to 80%, the central bank decided to cut the rate by 100 basis points in a bid to boost growth. This comes ahead of a general election set to occur next year. Many have expressed surprise that while other central banks are tightening monetary policy, Turkey’s central bank has loosened it.

Since September last year, the central bank has been bucking the trend by easing monetary policy and cutting interest rates. The base rate was cut from 19% in September 2021 to 14% by December and remained there until the most recent cut. However, this resulted in the highest inflation rate seen in Turkey for a quarter of a century.

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soaring inflation

Bank was expected to keep the base rate static

According to reports, analysts widely expected the base rate to remain static at 14%. However, with the 1% cut, the base rate has now been taken down to 13%, with the central bank expressing concerns over slowing economic growth.

In a recent statement, the CBRT said: “Leading indicators for the third quarter point to some loss of momentum in economic activity. It is important that financial conditions remain supportive to preserve the growth momentum in industrial production, and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk.”

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Data shows that the lira has dropped by more than 25% this year, with many foreign investors fleeing the market due to rocketing inflation and concerns over the central bank’s monetary policy. It is claimed that President Recep Tayyip Erdoğan believes the weak currency could aid the exportation of more goods by manufacturers and that low-cost credit could boost jobs and investment.


In addition, the president believes that high interest rates can result in inflation – something that the governor of the Turkish central bank agrees with. Conversely, mainstream economists believe that interest rates must increase to control inflation.

With the general election set to take place next year, some believe that the latest rate cut could be a move to try and keep the economy afloat until the election occurs. Support for the current government has plunged to all-time lows as people continue to struggle with the soaring cost of living.

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Ceyhun Elgin, a professor of economics at Boğaziçi University in Istanbul, said: “Instructions may have come down for a cut amid signs growth may be slowing. The aim may be to carry things forward, for better or for worse, until the election.”

The move to cut rates has been slated by some, including Cristian Maggio, head of emerging markets strategy at TD Securities. He said: “With this decision, the central bank of Turkey drops any residual pretence to be targeting inflation and reveals its overarching goal of supporting growth. With inflation at 80 percent, however, this recipe only spells disaster.”