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Economy

Despite High Inflation, Turkey Keeps Interest Rate Unchanged

February 17, 2022

ANKARA — Turkey’s central bank on Thursday kept its key interest rate unchanged for a second consecutive month despite soaring inflation that has left many in the country struggling to purchase food and basic goods.

A statement from the bank’s Monetary Policy Committee said it will keep its policy rate “constant” at 14%. Last month, the central bank put its rate-cutting policy on hold after reducing borrowing costs by 5 percentage points since September.

The string of rate cuts triggered a currency crisis and sent consumer prices skyrocketing. Typically, central banks increase interest rates to fight surging inflation, which many have or are planning to do worldwide.

But Turkish President Recep Tayyip Erdogan, a self-proclaimed enemy of high interest rates, has pressured the central bank into lowering borrowing costs in his bid to boost growth. He argues that high interest rates cause inflation, contradicting conventional economic thinking.

The Turkish lira lost some 44% of its value against the dollar last year, while inflation surged to nearly 49% last month — reaching a 20-year high and sharply eroding people’s savings and purchasing power. Experts say the real rate of inflation could be much higher than the official figure.

Erdogan’s government has introduced unconventional measures to halt the depreciation of the Turkish lira instead of raising interest rates. The measures include a program that encourages people to keep their savings in lira through guarantees to compensate losses from the decline of the Turkish currency.

Earlier Thursday, Erdogan said his government was working to rescue the country from the “shackles of interest rates, currency rates and inflation.”

“The issue of interest rates has dropped from the agenda to a large extent. The currency rate has also been brought under control. Next in line is bringing inflation down to single digits,” he said.

This week, the government said it was reducing value-added tax on basic food to 1% from 8%.

Erdogan said Wednesday that the government also would introduce a set of measures aimed at bringing some relief for households and businesses reeling from surging power bills, including readjusting the level under which higher electricity tariffs for households using more energy kick in.

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