Turkey leaves interest rates unchanged even after inflation surges

Turkey’s central bank kept its benchmark interest rate steady on Thursday despite a sharp uptick in inflation to the highest level in two decades.

The central bank, acting on President Recep Tayyip Erdoğan’s orders, cut interest rates in the last four months of 2021 then kept them steady to help boost economic growth and slow inflation. The unorthodox response to surging prices – inflation hit 48.7 percent in January, led to a sharp sell-off in the lira, which lost 44 percent of its value last year.

The benchmark one-week repo rate will remain at 14 percent, the central bank said after a monthly meeting of its Monetary Policy Committee. It said transitory effects were to blame for the acceleration in inflation.

“The increase in inflation in the recent period has been driven by pricing formations that are not supported by economic fundamentals,” the bank said in the reasoning for its decision. It referred to rising global energy, food and commodity prices, as well as supply constraints.

“The Committee expects the disinflation process to start on the back of measures taken and decisively pursued for sustainable price and financial stability along with the decline in inflation owing to the base effect,” the bank said.

Erdoğan’s government cut sales taxes on many foods to 1 percent from 8 percent this month to help curb inflation and has threatened retailers with heavy penalties if they do not pass on lower costs to consumers. On Wednesday, Erdoğan announced reductions in the cost of electricity and natural gas.

On Thursday, the president vowed to “decimate” the shackles of interest rates and exchange rates. The lira lost 44 percent of its value last year as Turks and foreign investors sold the currency on concerns about unorthodox monetary and economic policies.

The lira was trading down 0.1 percent at 13.64 per dollar after the rates decision was announced. The central bank has spent over $15 billion supporting the lira by selling dollars since the start of December, official data shows.

A “comprehensive review of the policy framework is being conducted with the aim of encouraging permanent liraization in all policy tools of the CBRT,” the central bank said in its statement.

Many economists are calling on the central bank to hike interest rates, saying that higher borrowing costs are the only means to ensure sustainable economic growth and financial stability.

On Friday, Fitch Ratings cut Turkey's sovereign debt further into junk territory. It warned that government policy threatened further financial turmoil ahead of presidential and parliamentary elections slated for next year.

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