Turkey’s central bank may be lowering the benchmark interest rate but the policy has led to a slump in the value of the lira and higher borrowing costs for the Treasury and many Turks.
President Recep Tayyip Erdoğan has instructed the central bank to slash interest rates over the past three months, sparking record losses for the Turkish lira. Erdoğan says the currency’s value will stabilise and the rate cuts will help Turkey rid itself of a cycle of high interest rates and high inflation within just a few months.
Official data shows that Erdoğan’s economic plan is not having the desired results.
While the central bank has cut interest rates to 15 percent from 19 percent since Sept. 23, the cost of borrowing for the Treasury has climbed – annual yields on Turkish lira 10-year debt have risen by 5 percentage points to 21.57 percent.
The cost of repaying personal loans has increased to an annual 23.57 percent from 23.1 percent since mid-September, according to central bank data. While interest rates on commercial loans have dropped to 18.88 percent from 21.26 percent, helped by a splurge in cheap lending by state-run banks, dollar loans now carry average rates of 3.47 percent compared with 2.69 percent three months ago.
The central bank’s dovish monetary policy has brought a slump of 36 percent in the value of the lira since the September rate cut, increasing the cost of imported goods for Turkish businesses and consumers. The currency reached a record low of 13.97 per dollar last week. Meanwhile, consumer price inflation has accelerated to 21.3 percent from 19.25 percent in August. Prices rose by 3.51 percent in November alone.
Producer price inflation is now running at 54.6 percent, the highest level since 2003.
A monthly survey by the Istanbul Chamber of Commerce and IHS Markit showed that Turkish manufacturers faced a substantial increase in purchasing costs and weakness in new orders, meaning that any decrease in the cost of borrowing is being negated by a deteriorating business environment.
The lira’s collapse means financial conditions in Turkey are tightening and the country’s economy is expected to contract by a cumulative 2.5 percent this quarter and next, London-based Capital Economics said in a report to clients this week. Inflation may accelerate to 30 percent in the next few months, it said.
Ahval