The Central Bank of lowered its benchmark interest rate by one percentage point to 12% on Thursday, despite an increase in inflation that exceeded 80% across the country.
Collapse of the lira
According to the Associated Press, the move is inconsistent with the steps taken by the global economies that raise interest rates to control inflation and price hikes. It has caused the Turkish lira to drop to its record low of 18.38 pounds to the dollar, and the currency’s depreciation is likely to cause more damage to consumers facing rising energy, food and housing costs.
Turkey was plunged into a new economic crisis when President Recep Tayyip Erdogan launched an unconventional economic experiment about a year ago in an attempt to reduce chronically high inflation by lowering interest rates. The move prompted the lira to retreat and lost 44% of its value by the end of the year. The Turkish president maintains the unconventional belief that high borrowing costs lead to higher prices, which is contrary to the well-established economic theory, according to the agency.
In an interview with PBS NewsHour this week, Erdogan dismissed inflation as a “crippling economic threat,” saying that “countries are currently threatened with inflation rates of 8% and 9%. This rate is 80% in our country,” he said. “The shelves of the markets are not empty in my country, but they are empty today. Even in the United States, France and Germany, citizens now have access to all kinds of products they want.”
The Associated Press confirmed that Turkey expects inflation to fall to 65% by the end of the year, according to the government’s projections issued earlier this month, but the inflation rate in Turkey rose to 181.4% last August from 176% in July, according to a nationwide inflation measure published by the Enag Group, an independent body of Turkish academics.
ENAG: It uses roughly the same methods and data set as the Statistical Institute to calculate inflation, and opinion polls show that most Turks do not believe in official inflation data, according to the Associated Press.