ISTANBUL — Turkey’s central bank on Thursday cut interest rates again massively despite skyrocketing inflation above 80%, acting in contrast to global economies raising rates to control prices as the lira slumped. dropped to record lows.
The Central Bank of the Republic of Turkey lowered the key rate by 1 percentage point to 12%. The lira was trading around 18.38 against the dollar, weakening more than the previous high of 18.36 in December.
The depreciation of the Turkish currency is expected to intensify the financial worries of residents who have seen their purchasing power eroded during a series of economic shocks in the country.
Turkey has followed President Recep Tayyip Erdogan’s unorthodox belief that high interest rates lead to high inflation, reducing borrowing costs despite consumer prices rising 80.21% in August from the previous year. Traditional economic thinking says that raising interest rates fights inflation.
“Inflation is not a crippling economic threat,” Erdogan said in an interview with PBS NewsHour this week. “There are currently countries threatened by inflation rates of 8% and 9%. This rate is 80% in our country.”
He said Turkey would bring inflation under control after the New Year and supermarkets were well stocked.
Central banks around the world are taking the opposite action from Turkey, aggressively raising rates to target runaway inflation.
The US Federal Reserve hiked rates by three-quarters of a point for the third straight time on Wednesday, followed by the Swiss National Bank’s biggest key interest rate hike on Thursday. The Bank of England decreed a smaller hike of half a point as other banks from Europe to Canada moved quickly to curb rising prices.
Official Turkish statistics released this month showed annual inflation to be the worst in the Group of 20 major economies, but independent experts say inflation is actually much higher.
Critics also claim that the independence of the central bank and the official statistical institute has been undermined under the Turkish presidency.
Last year, the currency continued to hit record lows as the central bank cut interest rates by 19%. When it finally reached 18.36 against the dollar, Erdogan announced extraordinary measures which he believed would protect the lira.
The government encouraged people to exchange their dollars for the lira and place them in a deposit account which would yield the interest rate plus any depreciation of the lira against the dollar. Although the pound rebounded from the announcement to hit a high of 11.09, it has steadily declined this year.