Turkey flag image over graph

Turkey’s central bank cut its policy interest rate from 9 percent to 8.5 percent last week, partly in response to this month’s earthquake that devastated swaths of Syria and Turkey and killed tens of thousands of people.

“It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake,” bank officials said in a statement announcing the reduced rate.

Mandated by Turkey’s president Recep Erdogan, the bank has been cutting rates for two years as its inflation ran hottest among any Western country, peaking at about 85 percent in October.

The country’s inflation rate was pegged at 58 percent last month.

The bank’s key rate was 19 percent in March 2021. Erdogan had fired bank officials who had raised it as inflation flared and then installed an ally who would enact his demands for lower interest rates, regardless of consequences.

Erdogan, who is running for re-election this year, has declared himself “an enemy of high interest rates.”

His policy of cutting rates in the face of galloping inflation—a move contrary to economic theory and common experience—has cratered the country’s currency, the lira, and is a “new economic model,” he has said.

In Erdogan’s view, a near-worthless currency makes Turkey’s exports cheaper abroad, energizing foreign trade, sparking an employment boom, and buoying the economy.

Instead of boosting exports, the cheap lira brought a surge of tourists after COVID-era lockdowns were lifted. (See “Turkey: Erdogan’s New Economic Model Works – Sort Of” 20 Dec 2022.) The economy has enjoyed something of a reprieve as a result.

However, economists continue to fear that ever-lower rates will encourage borrowing and spending that, in turn, will drive inflation faster.

At least until the election, Erdogan is unlikely to shift his stance and “monetary and fiscal policy will remain broad” until then, Enver Erkan, an independent economist, told the Financial Times.

To counter the impact of its low rates, Erdogan’s government has instituted a mix of incentives for borrowers and savers to hold more lira instead of selling them for dollars.  

Those policies, as well as the central bank’s relentless interventions in the currency market, have softened the bite of a floundering lira.

After the latest interest rate reduction, the lira traded at 18.87 against the dollar, near its recent record low. The lira’s value has shrunk 27 percent against the buck since February 2022.

The downward spiral of “Erdoganomics” is detailed in our past articles, including:

● “Turkey’s Central Bank Governor Fired After Rate Hike” (23 Mar 2021)

● “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 2021)

● “Turkey: Another Day, Another Central Bankster Fired” (1 Jun 2021)

● “Turkey: Interest Rates Down, Lira Crashing. War Next?” (19 Oct 2021)

● “Turkey’s Economy Continues to Implode” (14 Dec 2021)

● “Turkey’s Inflation Rate Nears 50 Percent” (8 Feb 2022)

● “Turkey’s Bonds Downgraded, Worse to Come” (22 Feb 2022)

● “Turkey’s Economy Weakens Further Under Erdogan’s Policy” (14 Jun 2022)

● “Inflation in Turkey Passes 80 Percent” (13 Sep 2022)

● “Only in Turkey: Inflation Rises, Interest Rates Fall” (27 Sep 2022)

● “Turkey’s Central Bank Cuts Interest Rate Again” (25 Oct 2022)

TREND FORECAST: Erdogan will use his mix of carrots and sticks—economic incentives and central bank interventions, plus his well-known penchant for dealing brutally with protesters—to hold the status quo through the election, which, once again, will be rigged in his favor.

He also will continue to insert himself in world affairs—most notably the Ukraine war—to build his stature at home as a way to neutralize his abysmal bungling of his country’s economy.

His move after that will be determined by the state of the world’s economy.

If the global economy is struggling onward, his policy is unlikely to change until the central bank becomes destitute or inflation begins to destroy Turkey’s economy in ways he is unable to control. At that point, he will point to “outside enemies” messing with Turkey.

If things reach that point, Erdogan is likely to become even more volatile and aggressive. As Gerald Celente says, “When all else fails, they take you to war.”

Skip to content