Turkey Reduces Interest Rates by 150 Basis Points and Concludes Its Easing Cycle

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Last Updated on November 24, 2022 by Bitfinsider

On Thursday, the Turkish central bank lowered interest rates by 150 basis points to 9% and ended its cycle of monetary policy easing, citing rising inflation risks.

President Recep Tayyip Erdogan has exerted constant pressure on the CBRT (Central Bank of the Republic of Turkey) to continue cutting rates despite surging inflation, which reached 85.5% year-on-year in October as food and energy costs continued to surge.

“Taking into account the rising risks associated with global demand, the Committee determined that the present policy rate is adequate and decided to halt the rate-cutting cycle that began in August,” the central bank said in a statement.

Economists believe Erdogan’s stance that increasing interest rates in accordance with global central banks would be detrimental to the Turkish economy has led to a considerable devaluation of the lira and increased inflation. The president has stated numerous times that he intends to reduce the country’s interest rate to single digits by the end of the year.

“While the negative effects of supply restrictions in some sectors, especially basic food, have been mitigated by Turkey’s strategic responses, the higher trend in producer and consumer prices persists on a global scale,” the central bank said.

“The consequences of rising global inflation on inflation expectations and international financial markets are examined regularly.” Moreover, central banks in advanced nations underline that the rise in inflation may endure longer than anticipated due to high energy prices, supply-and-demand mismatches, and labor market rigidity,” the report noted.

The CBRT is conducting a review of its policy framework, with a focus on the “liraization” of its financial system, and stated in its Thursday report that it will “continue to use all available instruments” until “strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved.”

“Stability in the general price level will promote macroeconomic and financial stability through the decline in country risk premium, the continuation of the reversal in currency substitution and the upward trend in foreign exchange reserves, and the sustained decline in financing costs,” according to the CBRT.

This would ensure that investment, production, and employment continue to increase in a healthy and sustainable manner.

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