Turkey’s central bank on Thursday cut its policy rate for the third consecutive month despite plunging lira and an annual inflation rate that has soared over 83 percent, Agence France-Presse reported.
The central bank said it was cutting its one-week repo rate to 10.5 percent from 12 percent, with a surge in consumer prices it said was “driven by the lagged and indirect effects of rising energy costs” caused by Russia’s war on Ukraine.
The decision comes right after President Recep Tayyip Erdoğan said the central bank would keep cutting rates every month for “as long as I am in power”.
Erdoğan wants interest rates to lower down to single digits by the end of the year as he prioritizes economic growth eight months before a general election — which could promise to be the closest since he came to power nearly two decades ago.
Turkish decision makers have insisted on following this unconventional economic model at the expense of an astronomical inflation.
Erdoğan, a vocal opponent of higher borrowing costs, has called high interest rates his “biggest enemy.”
Earlier this month he vowed that while he remained in power, “the interest will continue to come down with each passing day, each passing week, each passing month.”
As a result, Turkish lira keeps losing its value against the US dollar and is down 28 percent since January.
“Erdoğan’s economic re-election strategy is clear… use money from Russia and (the) Gulf to fund FX intervention to defend the lira, cut policy rates as far as possible to get credit and growth going,” BlueBay Asset Management analyst Timothy Ash said.
The powerful Turkish leader has responded to the economic crisis by an overhaul of his foreign policy and repairing ties with his former rivals in the Arab world, including oil-rich Saudi Arabia.
Additional trade-focused deals with Russia have helped shore up Turkey’s dwindling foreign currency reserves and potentially given Erdoğan enough breathing room to ride out the economic storm until the June election.
However, Washington has been warning Turkish companies and banks trading with Russia for several months they could face possible sanctions.
US assistant secretary for terrorist financing and financial crimes Elizabeth Rosenberg traveled to Ankara and Istanbul this week, the Department of the Treasury said.
Rosenberg’s meetings “affirmed the importance of close partnership between the United States and Turkey in addressing the risks caused by sanctions evasion and other illicit financial activities.”