Turkey Lowers Interest Rates Despite Inflation Surging to 80%

Turkey’s central bank makes an unexpected rate cut amid record-high inflation levels

While central banks worldwide have been aggressively hiking interest rates to tame inflation, Turkey is charting a unique path.

Despite inflation skyrocketing to nearly 80%, Turkey’s central bank has reduced its benchmark interest rate from 14% to 13%, marking the first cut after seven months of stability. This move caught analysts off guard, as most anticipated no change.

President Recep Tayyip Erdogan has been a vocal advocate for lowering borrowing costs, aiming to boost economic expansion, attract investments, and increase exports. Contrary to conventional economic wisdom that links higher interest rates with inflation control, Erdogan argues that rising rates actually fuel inflation.

In July, Turkey recorded an inflation rate of 79.6%, the highest in over two decades, driven by surging food and energy prices.

Following the unexpected rate reduction, the Turkish lira depreciated by approximately 1%, trading above 18.1 per US dollar—close to historic lows. The lira has plunged 26% against the dollar this year alone, compared to 3.5 five years ago.

Caleb Silver, Editor-in-Chief at Investopedia, noted, "This marks Turkey’s fifth consecutive repo rate cut, positioning its inflation rate at 79.6%, second only to Venezuela's staggering 167%."

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