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Turkey cuts interest rate despite soaring inflation

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Turkey’s central bank cut interest rates for the second successive month on Thursday in what economists interpreted as confirmation of its loss of independence from President Recep Tayyip Erdoğan, Agence France-Presse reported.

The bank cut its policy rate to 16 from 18 percent despite soaring inflation and a depreciating currency.

The lira hit new record lows against the dollar and euro after the announcement.

The central bank’s interest rate cut decision came despite a call from the country’s main opposition leader Kemal Kılıçdaroğlu who repeated his calls for the bank to “not take orders,” as the monetary policy committee was preparing to meet on Thursday to set interest rates.

“Do whatever is needed, do not take orders from someone,” Kemal Kılıçdaroğlu, leader of the Republican People’s Party, said in speech in northeastern Kars province.

“Don’t take decisions that will further make our citizens suffer.” Kılıçdaroğlu, who had a surprise meeting with central bank governor Şahap Kavcıoğlu on Friday, has called on Erdoğan to “respect the central bank’s institutional identity” and leave interest rate decisions to “qualified people.”

Erdoğan has been pushing the policy-setting bank to cut interests rates in order to boost lending and promote investment and economic growth.

This expansionist policy has helped Turkey’s economy grow throughout the coronavirus pandemic and perform far better than its emerging market peers.

But the drawbacks have also been dire.

The lira has lost one fifth of its value against the dollar and the annual inflation rate has reached nearly 20 percent — quadruple the government target.

Turks are converting their liras into foreign currencies and gold to try and preserve their dwindling savings as a result.

Thursday’s cut reaffirms “that monetary policy is firmly under Erdoğan’s influence,” Eurasia Group said in a research note.

The research institute noted that a growing number of business leaders — including Turkey’s largest industry association — have been calling on the bank to regain its independence and focus on stabilizing the exchange rate.

Erdoğan is in danger of “dragging the Turkish economy into a president-made crisis,” Eurasia Group said.

Turkey’s financial problems have been accompanied by an unusual spike in dissent from the country’s business community.

The Turkish Industry and Business Association issued a veiled swipe this week at Erdoğan’s focus on achieving economic growth at all costs.

The central bank blamed rising inflation on “transitory” factors that will dissipate with time.

“The recent increase in inflation has been driven by supply side factors such as the rise in food and import prices, especially in energy, and supply constraints,” the bank said.

“It is assessed that these effects are due to transitory factors.”

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