Türkiye with lowering interest rate policy
Unlike most of the world’s central banks, and in violation of general economic policy, Türkiye continues to reduce the interest rate instead of raising it.
The Turkish administration’s insistence on this raises many question marks, especially in light of Türkiye’s suffering from record inflation rates that are constantly escalating.
What are Türkiye’s standpoints regarding lowering interest policy?
As a result of the major jumps in inflation rates in advanced economies, which reached record levels that haven’t occurred in the previous four decades, many major central banks have adopted tight monetary policies, primarily raising interest rates, in an attempt to curb inflation.
It seems clear that there is an agreement between these banks that raising the interest rate will withdraw a large percentage of domestic liquidity, which will reduce consumption and investment activities, and therefore it is expected to reduce prices as a logical result of the decline in aggregate demand.
Despite the failure to produce tangible results regarding reducing inflation rates in any of the countries that followed the policy of reducing the interest rate continuing for several months past, and despite the mounting warnings of the transformation of the results of those policies towards deflation and possibly stagnation, the reduction policy is still continuing in light of the current situation.
Of the obvious confusion of economic management in most countries of the world, especially in light of the successive declines of global currencies against the dollar, which caused further ignition of inflation rates.
The interest rate constituted a major point of contention between the administration of the Turkish President Recep Tayyip Erdogan and the successive governors of the Central Bank of Türkiye, which prompted the president to use his constitutional powers to dismiss three consecutive governors.
It should be noted at the outset that this Turkish approach wasn’t emotional or a reaction to the current global economic conditions.
Rather, it was a principled position announced several years ago, during which the Turkish administration tried to reduce interest rates.
Global conditions, foremost of which is the repercussions of the Coronavirus, stood in the way of achieving this at sufficient rates, and the Turkish administration withstood the sharp criticism arrows directed at it by the major central banks that followed accommodative policies that caused what the world is suffering now.
A few days ago, Turkish President Recep Tayyip Erdogan expressed his hope that the Central Bank’s Monetary Policy Committee would make another interest rate cut next month, and bring the price down to the single digits at the end of the year, adding that his country aims to strengthen the lira by lowering interest rates.
He added that Türkiye will continue to reduce interest rates, not raise them, reiterating his unconventional view that lower interest rates will lead to lower inflation, calling on Turks to take advantage of low prices to make investments.
The central bank had unexpectedly cut the interest rate by 100 basis points twice in the past two months, bringing it to 12%, despite inflation reaching 83.45% last August, its highest level in 24 years.
The Turkish Central Bank attributes its decision to cut the interest rate to the continuous indicators of the economic slowdown, and many believe that the monetary easing comes in response to the Turkish president’s efforts to reduce borrowing costs to increase exports and investment.
Realistically, the interest rate hike policies didn’t succeed in curbing inflation around the world, but many warnings began around the world of the negative repercussions of this policy on the levels of economic activity.
The US economy under the weight of stagflation is inevitable, as there is a slowdown in economic growth in conjunction with an acceleration in the inflation rate.
“The risk of a recession is rising due to a series of cascading supply shocks,” said Joe Brusuelas, chief economist at RSM US LLP.
The previous opinions of experts are just examples of many opinions that confirm the same orientation, and also confirm the Turkish administration’s view of violating the world and heading towards reducing interest.
In practice, it should be noted that the Turkish harvest due to the lack of progress in the global trend is the steady increase in the growth rate, which reached 7.5% – 7.6% in the first and second quarters of this year.
Turkish exports have also achieved record jumps in recent years, recording 225 billion dollars last year, up from 185 billion dollars in 2020, and the numbers so far indicate the great possibility of exceeding the 250 billion dollar barrier by the end of this year, and the Turkish administration hopes to achieve the goal of one billion dollars exports daily at the end of next year.
The Turkish government has a rational vision about the policy of reducing the interest rate, and global data have proven the futility of the successive rise in addressing inflation, and even its negative effects on the levels of economic activity and the escalating possibilities of causing it to stagnate, and Turkish domestic data proved the feasibility of lowering the interest rate.
In stimulating investment, growth and exports, which confirms the rationality of the Turkish trend, especially in light of the state’s successive increase in the minimum wage to meet the rising inflation rates.
