Turkish President says will further lower policy rate

Turkish President Recep Tayyip Erdogan said the Central Bank will continue to lower benchmark interest rates, reiterating his unorthodox view that the price hikes are directly proportional with the policy rate.

“They constantly raised interest rates around the world. On the contrary, I struggled to lower it. We will further lower the rate that now stands at 9 percent,” Erdogan said during a live interview aired by state broadcaster TRT on Wednesday.

Claiming that interest and inflation are directly proportional, “Some might not believe this, but the interest is the cause, inflation is the result,” he said.

“My field is the economy, and the result is obvious,” Erdogan said.

Turkey's inflation has surged to record highs over the past year after the central bank adopted a rate-cutting policy despite increasing prices. Acting on the orders of Erdogan who insists on low interest rates, the central bank has lowered the benchmark one-week repo rate from 19 percent to 9 percent since 2021 autumn. Following the rate cuts in the country, Turkish lira lost around 44 percent of its value in 2021, and a quarter more in 2022.

Erdogan says rate hikes are against his Islamic beliefs and insists that low interest rates lead to lower inflation, an opinion that jars with conventional economic theory that says higher interest rates slow inflation.

In December, Turkish annual inflation sharply dropped to 64.27% from 84.4% the previous month, due to a beneficial base impact, after hitting a 24-year high in October to 85.5 percent.

The base effect occurs when year-on-year price increases look smaller, compared to extremely high levels 12 months earlier, but the latest reading is still higher than in any other emerging market except for Argentina.