Lira at record low: Turkish central bank is already lowering interest rates

The Turkish central bank has lowered its key interest rate again despite high inflation and the currency crisis.

It will be reduced from previously 15.0 to 14.0 percent, as the monetary authorities announced on Thursday.

Economists had expected this after the central bank had eased its monetary policy several times since September.

And this despite the fact that the inflation rate is currently more than 21 percent - well above the central bank's target of five percent.

According to the almost unanimous opinion of economists, higher interest rates would actually be necessary to counteract this.

However, President Recep Tayyip Erdogan has repeatedly called himself an “interest enemy”.

He wants to boost the economy with cheap money.

After the decision was announced, the lira fell to a record low of 15.5 against the US dollar.

The central bank has now signaled to interrupt the easing cycle in order to observe the effects over the next three months.

Erdogan's part in the development

The interest rate cuts are one reason for the continuing decline in the lira, which has lost around half of its value against the dollar this year.

The central bank has therefore intervened in the foreign exchange market several times in the past few days: Because of “unhealthy pricing”, it sold dollars to support its own currency.

The weakness of the lira, in turn, is fueling inflation because it makes imports such as oil and medicines more expensive.

The collapse of the currency is now worrying the German economy. "Because this makes goods from abroad more expensive, demand in Turkey is reduced and German exports suffer," said the president of the BGA foreign trade association, Dirk Jandura, recently to Reuters. Exports to Turkey fell by 30 percent in August. Export goods such as machines, cars and auto parts as well as chemical products are particularly affected. Germany is the most important trading partner and one of the largest foreign investors in Turkey: in 2020 the bilateral trade volume was 36.6 billion euros.

The central bank has rapidly lost its reputation among investors.

President Erdogan contributed to this by repeatedly calling for interest rate cuts and killing three central bank governors within two and a half years, which calls into question the independence of the monetary authorities.