Turkey cuts policy rate by 150 basis to 10.5% despite rampant inflation

Turkey has cut interest rates for the third month running as president Recep Tayyip Erdogan seeks to prioritize growth over financial stability ahead of next year’s elections.

The central bank announced on Thursday that it was lowering its benchmark one-week repo rate 150 base points from 12% to 10.50% despite rampant inflation that exceeded 83% in September. The central bank also announced it will make another rate cut in the next meeting and then will end the cut cycle.

The bank said in a statement that “geopolitical risks on the global economy are increasing and recession expectations are getting stronger on a global scale.” 

"Increase in inflation is driven by the lagged and indirect effects of rising energy costs resulting from geopolitical developments, effects of pricing formations that are not supported by economic fundamentals, strong negative supply shocks caused by the rise in global energy, food and agricultural commodity prices," it said.

Ultra-low real interest rates are the centrepiece of Erdogan’s deeply unorthodox approach to managing the $830bn economy as he prepares for a challenging bid for re-election next year.

The president, who is notorious for his rejection of the established economic wisdom that high interest rates help to tame inflation, has argued that he is pursuing a new economic model that will bring down inflation by prioritizing exports, investments and jobs.