Home » World » Liraization, or why Turkey continues to lower rates despite 80% inflation.

Liraization, or why Turkey continues to lower rates despite 80% inflation.

Central banks were the big economic players of the week. The US Federal Reserve announced on Wednesday a 75 basis point hike in interest rates, expected by most of the market, although its chairman, Jerome Powell, has frightened the body of investors by tightening his roadmap. A few hours later, Switzerland imitated the US central bank and left negative rates behind, while England capped its hike to 50 basis points. In all three cases, the inflation figure, the great enemy to fight, does not reach two figures. But Turkey insists on sailing against the tide.

The Turkish central bank announced an interest rate cut of 100 basis points to 12% on Thursday. But the easing of monetary policy occurs when the most recent inflation, for the month of August, stands at 80.2%, the highest level of this century and the 15th consecutive monthly increase. In fact, in the last two years the country has only experienced one month in which inflation has fallen.

As seen in the graph, the Turkish central bank lowered rates during the first months of the pandemic, but they were raised in the autumn and winter of 2020 and stabilized in the spring of 2021. But just when inflation was already close to 20 %, the bank has started lowering interest rates.

In the statement announcing the rate cut, the central bank admits that “the weakened effects of geopolitical risks on world economic activity” and that counterparts in advanced economies stress that “the rise in inflation could last longer than expected. “. the increase in the price of energy, the imbalances between supply and demand and the rigidity of the labor markets ”. So why is Turkey going in the opposite direction?

The entity led by Sahap Kavcioglu reports “strong growth” in the first half, which has slowed in recent months due to the decline in external demand. “It is important that financial conditions remain favorable to preserve the momentum of industrial production growth and the positive trend in employment in a period of growing uncertainty about global growth and increasing geopolitical risk,” they justify.

“The CBRT (Turkish Central Bank) will continue to use vigorously all available tools under the liraization strategy until solid indicators point to a permanent decline in inflation and the 5% MTO after the main objective of price stability “, indicate while the official data for August record inflation on an annual basis of 80.21%.

Lyralization

Governor Kavcioglu praised in the middle of this month the good results that the liralization strategy is giving. The president of the central bank explained that “high dollarization increases the sensitivity of the economy to internal and external shocks and leads to the formation of prices in exchange rates that deviate from economic fundamentals”. This high level of dollarization and the high level of current account deficit “reduce the effectiveness of monetary policy”, so the goal set for months by the CBRT is to reverse this, although it is currently being done at the expense of an excessive rate. of inflation.

The reality is that the Turkish lira has been undergoing a steady decline in value for years. So far this year it has devalued by 27% against the dollar and in the last five years the decline has been 80%. Following this week’s decision by the CBRT, the Turkish currency raised the lows in its cross against the greenback.

Experts indicate that Turkish President Recep Tayyip Erdogan is largely responsible for this counterintuitive trend of lowering rates as prices rise, focusing on the elections to be held in the country next year. The president, who has been president of the republic since 2014 and has served as prime minister for more than a decade, said this week that “inflation is not an insurmountable threat.”

Meanwhile, the country’s trade and current account deficits have increased in recent months and its foreign exchange reserves are low.

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