Inflation crept up above 11 percent in December, but Turkish president Recep Tayyip Erdoğan has forced the country’s central bank to cut its benchmark one-week repo rate from 12 to 11.25 percent. Analysts had expected a cut no more than half a point.
This is the fifth consecutive cut since July 2019.
Because the inflation and interest rates are essentially the same, the actual interest rate is effectively zero.
Erdoğan has promised to cut the inflation rate to single digits, and the central bank is targeting an 8-percent inflation rate by 2021.
After a 2018 currency crisis cut the value of Turkey’s money by a third and ignited inflation to a rate of 25 percent at one point, Erdoğan is pushing interest rates lower to jump-start the economy. He believes – contrary to standard economic theory – that lower interest rates also will tame inflation.
The looser monetary policy helped Turkey’s economy grow by 0.9 percent in 2019’s fourth quarter after contracting during the first nine months of the year.
The South African Reserve Bank suddenly cut its base interest rate last week by a quarter-point to 6.25 percent. The country’s inflation risk is low and the economy in Africa’s most financially sound nation is weakening.
The move surprised analysts because the bank’s interest decisions usually reflect those of the U.S. Federal Reserve, which left interest rates unchanged at its last meeting.
The bank shrank its 2020 growth forecast from 1.4 to 1.2 percent and its 2021 outlook from 1.7 to 1.6 percent.
TREND FORECAST: While there are expectations among the financial community that the dollar will weaken this year, with many global economies suffering economic slowdowns, those nations that have room to do so will continue to lower interest rates in efforts to stimulate their economies.
Therefore, the lower their interest rates go, further their currencies will weaken, which will in turn push the U.S. dollar higher.
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