ISTANBUL: Turkiye’s central bank on Thursday stunned the markets by lowering its main interest rate even as inflation soared to a 24-year high and looks set to climb further.

The central bank said “recession is increasingly assessed as an inevitable risk factor” as it lowered its one-week repo auction rate to 13 per cent from 14pc.

“Just insane — with inflation at 80 per cent and rising,” BlueBay Asset Management economist Timothy Ash remarked in an emailed comment.

“Turkiye’s central bank (has) stepped up its fight against economic orthodoxy,” Jason Tuvey of Capital Economics added in an ironic note. “The move increases the risk of yet another currency crisis.”

The Turkish lira lost one per cent of its value against the dollar within moments of the announcement. Turkiye’s monetary policy decision contradicts the approach pursued by most other countries as they try to combat the spike in consumer prices caused by Russia’s invasion of Ukraine.

The war has sent food and energy prices soaring and forced central banks to raise borrowing costs — even as economic growth remains anaemic.

But Turkish President Recep Tayyip Erdogan subscribes to the unorthodox belief that high interest rates cause inflation rather than rein it in. He has fired three central bank governors since 2019 who have tried to pursue a more conventional economic course.

Turkiye now has a real interest rate of negative 66.6pc when adjusted for inflation. This forces businesses and ordinary people to spend as much as possible before their liras lose even more value with each month.

Weak lira

Some economists interpreted the rate decision as a concerted effort by Erdogan’s team to devalue the lira in order to spur growth through cheaper exports.

Erdogan has touted this export-driven growth as a “new economic model” that a powerful and independent Turkey should pursue in order to reduce its dependence on global powers.

The lira has lost more than half its value against the dollar in the past year alone.

Published in Dawn, August 19th, 2022

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