Turkey keeps interest rates at 14 percent despite 70 percent inflation

Turkey’s central bank left interest rates deeply in negative territory, when subtracting the annual inflation rate, even after price increases extended a two-decade high.

The central bank’s monetary policy committee kept the benchmark rate unchanged at 14 percent. Consumer prices in Turkey jumped by 70 percent in April. Producer prices rose by an annual 122 percent.

Turkey has the lowest interest rates globally, net of inflation, but has the highest inflation in industrialised nations and emerging markets. Inflation in Turkey has jumped after the central bank cut its benchmark rate to 14 percent from 19 percent late last year and then kept it on hold. Other central banks around the world have tightened monetary policy to help combat price increases.

Accelerating inflation in Turkey is not driven by economic fundamentals, rather by temporary effects, rising energy costs, geopolitical developments and negative supply shocks, the central bank said in its reasoning for keeping rates unchanged.

“The Committee expects the disinflation process to start on the back of strengthened measures for sustainable price and financial stability along with the decline in inflation owing to the base effect and the resolution of the ongoing regional conflict,” it said in a statement on its website.

President Recep Tayyip Erdoğan, who has sacked three central bank governors since the summer of 2019, has ruled out interest rate hikes as a means to tame inflation saying such a strategy contradicts his Islamic beliefs and fuels price increases. Traditional economic theory states that higher interest rates can be used as an effective means to slow inflation.

Consumer price inflation is expected to slow to 57.9 percent by the end of the year, according to a central bank survey of financial market participants published earlier this week. A previous survey in April had predicted year-end inflation of 46.7 percent. In January, the average estimate had stood at 30.3 percent.

The Turkish lira, which sank by 44 percent against the dollar last year, weakened 0.2 percent to 16.39 per dollar as of 2:38 p.m. local time in Istanbul, off an intraday low of 16.46 per dollar hit in mid-morning trading. Losses for 2022 totalled 19 percent.

Emerging markets will face a tough terrain over the coming quarters due to the war in Ukraine, ratings agency Moody's said last week. 

Countries that have stuck with credible monetary policy aimed at fighting inflation will face less financial risk, Moody's said. Markets are "sort of punishing" Turkey, said Atsi Sheth, Moody's global head of strategy and research.

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