Turkey keeps interest rates steady even after inflation hits 73.5 percent

Turkey’s central bank left its benchmark interest rate unchanged for a sixth-straight month even as inflation hit the highest levels since the late 1990’s.

The central bank’s monetary policy board kept the one-week repo rate steady at 14 percent, it said in a statement on its website on Thursday. Consumer price inflation in the country accelerated to 73.5 percent in May, according to official data.

Late last year, the central bank embarked on a rate-cutting spree ordered by President Recep Tayyip Erdoğan that saw borrowing costs fall from 19 percent. The policy caused a sharp sell-off in the lira, which has lost almost a quarter of its value this year after slumping by 44 percent against the dollar in 2021. The price of imports surged as a result.

“The board foresees that the disinflationary process will begin with the re-establishment of the global peace environment and the elimination of base effects in inflation, together with the steps taken and determinedly implemented to strengthen sustainable price stability and financial stability,” the central bank said in its reasoning for the decision. It blamed the surging cost of energy and other items as a major factor causing inflation.

“In this context, the board decided to keep the policy rate constant,” the bank said. “In order to institutionalise price stability in a sustainable way, the central bank continues to review a comprehensive policy framework that encourages permanent and strengthened liraization in all policy instruments.”

Annual inflation in Turkey stood at 19.3 percent in August last year, just prior to the rate cuts, which began in September. Inflation in the country is now the highest in emerging markets and industrialised nations.

The lira was trading down less than 0.1 percent at 17.35 per dollar after the central bank announced its rates decision. The decision to leave rates unchanged was almost unanimously predicted by economists, according to surveys conducted by Reuters and Bloomberg.

The central bank says its policies are now focused on a so-called “liraization strategy” rather than interest rates to deal with inflation and ensure financial stability. The strategy has involved encouraging Turks to save and carry out transactions in local currency.

Erdoğan said at the start of the month that Turkey will not raise interest rates, rather the central bank's next move would be to cut them. Erdoğan, who has replaced three central bank governors since 2019, maintains that higher interest rates are inflationary and are against his Islamic beliefs.

The central bank has spent more than $100 billion of its foreign currency reserves since 2018 and has engaged in currency swaps with state-run banks and monetary authorities abroad to defend the lira. The currency had traded at 3.78 per dollar at the start of 2018.

Investors say that the central bank may have little choice other than to hike interest rates unless it finds more funds to avoid a financial meltdown. It has secured currency swap deals with countries including South Korea and the United Arab Emirates, but its reserves, net of liabilities, have remained deeply in negative territory.

On Wednesday, Erdoğan welcomed Saudi Arabian Crown Prince Mohammed bin Salman to Ankara. The two governments have been negotiating a possible currency swap deal as they seek to normalise ties damaged by disagreements on regional policy and the murder in Istanbul of Saudi dissident journalist Jamal Khashoggi in 2018. But Prince Mohammed left the Turkish capital without any announcement of an agreement.

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