Responding to July’s inflation rate of 79.6 percent, Turkey’s central bank cut its key interest rate from 14 to 13 percent last week.
Analysts had expected the bank to leave the rate untouched at 14 percent.
“Leading indicators in the third quarter point to some loss of momentum in economic activity,” the bank said in a statement, leading it to cut the rate to spur economic growth instead of raising it to address inflation.
The cut is the latest move in president Recep Erdogan’s “new economic model” of driving down the value of Turkey’s lira currency to make the country’s exports cheaper abroad, which Erdogan claims will unleash a wave of prosperity at home.
The first part of his plan is working.
On news of the newest rate cut, the lira’s value slipped another 1 percent on 19 August, at one point falling below 18 to the dollar.
The lira has lost more than 25 percent of its value this year due to inflation and growing concerns that the country will not right its interest rate policy in time to avoid an economic collapse, the Financial Times reported.
Sahap Kavcioglu, the central bank’s governor, is a loyal supporter of Erdogan’s insistence that low interest rates will buoy the economy despite inflation being out of control.
Under his leadership, the bank has cut rates several times from the 19 percent his predecessor set last fall before being fired. (See “Turkey’s Central Bank Governor Fired After Rate Hike,” 23 Mar 2021.)
At the time, Turkey’s inflation rate was in the high teens.
Erdogan, who is up for re-election next summer, has nailed his credibility to his often-repeated claim that high interest rates cause inflation and lower rates will tame it.
He is too firmly wedded to the policy to change it now, analysts told the FT, despite his own and his political party’s popularity plunging to record lows as Turkey’s economy craters.
“The aim may be to carry things forward, for better or worse, until the election,” Ceyhun Elgin, economics professor at Turkey’s Bogazici University, said.
“With this decision, the central bank drops any residual pretense to be targeting inflation and reveals its overarching goal of supporting growth,” Cristian Maggio, emerging markets strategist at TD Securities, said in an FT interview.
“With inflation at 80 percent, however, this recipe only spells disaster,” he added.
TRENDPOST: Turkey’s economy is a slow-rolling disaster, as we have documented in:
- “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 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)
- “Erdogan Raises Turkey’s Minimum Wage by 30 Percent” (5 Jul 2022).
TREND FORECAST: As we have noted several times previously, Erdogan has a gift for committing himself to the most destructive economic policies. He has become so deeply invested in them that abandoning them now would be a public admission of his incompetence.
Instead, as next year’s election nears, Erdogan and his hand-picked sycophants at Turkey’s central bank will craft new short-term measures that will loot the bank’s reserves to give the lira CPR.
As he becomes more desperate, domestic protests will increase. This will give Erdogan a pretext to find “terrorists” and “foreign troublemakers” among his critics, cracking down even more on personal freedoms and increasing the chances of a rigged election in his favor next year.
Ultimately, Erdogan may seek to distract his nation with military action. As Gerald Celente often says, “When all else fails, they take you to war.”