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Pressure from Erdoğan: Turkish central bank cuts key interest rate again

2021-11-18T13:34:14.722Z

Turkish President Erdoğan wants to fight against high interest rates “until the end”. The central bank of his country is accommodating him with a further cut - from the point of view of experts a "literally crazy step".



Enlarge image

Rapidly losing value: Turkish lira notes (archive image)

Photo: MURAD SEZER / REUTERS

Despite the already very high inflation, the Turkish central bank lowered its key interest rate again.

The central bank announced that the interest rate would be reduced from 16 to 15 percent.

At the same time, a further easing of monetary policy for December could not be ruled out.

It was not until October that the monetary authorities lowered the key rate by two percentage points after lowering interest rates in September.

The central bankers view the high rate of inflation, which has recently climbed to almost 20 percent, as temporary.

You are actually aiming for an inflation rate of five percent.

"This is literally a crazy move that puts the lira in jeopardy," commented analyst Tim Ash of asset manager BlueBay Asset Management.

The local currency, the lira, slipped three percent against the dollar to 10.98 after the decision was announced.

"This does not create trust," said VP Bank's chief economist Thomas Gitzel, criticizing the central bank's decision.

This became apparent after President Recep Tayyip Erdogan had announced the day before that he would fight “until the end” against what he believed to be too high interest rates.

Erdogan is a declared opponent of interest rates and has kicked the last three central bank governors out of the door due to differences over monetary policy.

When prices rise sharply, most experts actually consider higher interest rates to be a suitable antidote, as this makes loans more expensive.

This in turn can dampen demand and thus slow inflation.

Higher interest rates also make a currency more attractive to investors.

If the exchange rate rises, imports, which are mostly traded in dollars or euros, can become cheaper - which would also slow inflation.

Also because of the interest rate cuts, the Turkish lira has depreciated by almost a third against the dollar this year.

That, in turn, should make it difficult for many companies to repay their foreign currency loans.

"The currency weakness is causing foreign currency liabilities, converted into Turkish lira, to climb," said economist Gitzel.

"This could make servicing the debt difficult in the future."

dab / Reuters

Source: spiegel

All business articles on 2021-11-18

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