Turkish Central Bank Cuts Interest Rates After Pressure from Erdogan

Turkey’s central bank has cut its key interest rate despite rising inflation in the country. The central bank seems to be responding to President Recep Tayyip Erdoğan.

 

He has been pushing for a reduction in borrowing costs for some time now.

The interest rate goes from 19 to 18 percent. Analysts hadn’t actually expected a rate cut because of the higher prices. Turkish inflation had risen to more than 19 percent last month.

The central bank has repeatedly promised that interest rates will always be higher than inflation. But with that, this year’s appointed banking governor Şahap Kavcioğlu was on a collision course with Erdoğan. As a result, Kavcioğlu now sidesteps the discussion by focusing on core inflation, excluding food and energy prices. As a result, there would now suddenly be room for an interest rate cut.

Turkey is struggling with the consequences of rising raw material prices and droughts that have hit the crops of agricultural products hard. In combination with a weaker exchange rate of the Turkish lira, this has made life in Turkey considerably more expensive in a short time.

Erdogan’s unorthodox economic views complicate the situation. According to the president, the high-interest rates cause inflation to rise. Common policy among economists and central bankers is to raise interest rates to control inflation.

Former central bank head Naci Ağbal was fired earlier this year after repeatedly raising interest rates to control inflation.