Photo by YASIN AKGUL/AFP via Getty Images
- The Turkish Lira fell to a record low on Thursday after the country’s central bank cut interest rates.
- Turkey’s central bank has been cutting rates despite soaring inflation due to pressure from the country’s president.
- Turkey’s inflation rate topped 80% in August, and the central bank responded with a 100 basis point rate cut.
Turkey’s lira fell to a record low against the US dollar on Thursday after the country’s central bank cut interest rates despite soaring inflation.
The lira hit a record low of 18.41 versus the dollar before falling back to 18.35 in Thursday trades.
While US inflation of more than 8% in recent months has been shockingly high, it’s nothing compared to Turkey’s August inflation rate of 80.2%.
And while the typical central bank playbook calls for higher interest rates to lessen consumer demand and tame inflation, Turkey’s central bank is going in a different direction due to ongoing pressure from the country’s president, Recep Tayyip Erdoğan.
The Turkish central bank cut rates by 100 basis points on Thursday, bringing its one-week repo rate to 12% from 13%. Thursday’s rate cut followed the country’s decision to cut rates by 100 basis points in August, which was followed by an additional 500 basis points of rate cuts since the end of 2021.
“Leading indicators for the third quarter continue pointing to loss of momentum in economic activity due to the decreasing foreign demand. It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment,” Turkey’s central bank said.
The rate cuts are seen as a move to help stimulate the country’s economy, which has been devastated by soaring inflation. But so far, the rate cuts haven’t helped, and Turkey’s decision flies in the face of past central bank experiences when it comes to bringing down inflation.
Federal Reserve Chairman Jerome Powell reiterated the US central bank’s resolve in taming inflation via more interest rate hikes on Wednesday, arguing that any short-term pain in the economy is more than worth it if it means a multi-year run in inflation is avoided.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all,” Powell said at his Wednesday press conference.
The quantitative easing from Turkey amid a period of soaring inflation has sent the country’s currency into a downward spiral relative to the US dollar. The Lira is down nearly 30% year-to-date relative to the US dollar, and is down about 70% over the past three years.
Whether Turkey’s unorthodox monetary policy manages to tame inflation, stabilize its currency, and boost economic activity remains to be seen, but so far, it’s not looking good.