Ignoring warnings from its business community, Turkey’s central bank cut its overnight repo rate for the second time in two months, from 18 percent to 16 percent.
The Central Bank of the Republic of Turkey has made a series of interest rate cuts this year, despite inflation running as high as 20 percent, according to the bank’s official statements.
A group of academics calculated the actual inflation rate to be closer to 40 percent, a claim that earned the group a criminal complaint (“Turkey: A Crime to Tell the Economic Truth?”, 5 Oct 2021).
The cuts have been made at the behest of Recep Erdogan, Turkey’s president, who believes that low interest rates will not only stir the country’s sluggish economy but also reduce inflation.
Erdogan has appointed leaders at the central bank who are politically allied with him and have carried out his wishes (“Turkey: Interest Rates Down, Lira Crashing. War Next?”, 19 Oct 2021).
The rate cut sank the lira to yet another new low against the dollar, down to 9.47 to the dollar. The Turkish currency has lost about 20 percent of its value against the buck so far this year.
The new cuts have driven returns on lira-denominated investments deeper into negative numbers, meaning that bonds, bank accounts, and other interest-bearing venues purchased with lira are guaranteed to lose value.
As a result, foreign investment in Turkey is plunging close to a 20-year low, analysts told the Financial Times.
Erdogan’s popularity is sinking, which has emboldened opposition politicians to speak out more strongly against his insistence on continued low rates, which have neither stimulated the economy nor tamed inflation.
Before bank officials met to cut the interest rate last week, opposition leader Kemal Kilicdaroglu tweeted to them, “When taking decisions today, your guiding principle should be nothing but the welfare of our nation.”
The rate cut is “a great shame,” right-wing political leader Meral Aksener said in a comment quoted by the FT. “Our great nation does not deserve this.”
TREND FORECAST: As we noted in our articles cited above, the country’s crashing currency and soaring inflation are adding fuel to an increasingly chaotic and unstable Turkish socioeconomic and geopolitical environment.
As the global economic recovery decelerates—and as inflation keeps rising across the globe—the lira and Turkey’s economy will continue to decline. Ongoing fears of the Delta virus will worsen Turkey’s plight; nearly 13 percent of its GDP rests on travel and tourism.
Erdogan’s domestic popularity recently fell to a two-year low and will continue to sink with citizens’ economic prospects.
For that reason, look for Erdogan to become more belligerent in his comments and actions directed at foreign “enemies.” Remember, as Gerald Celente has noted, “When all else fails, they take you to war.”