Turkey’s inflation nears 84% amid low interest rates

Customers shop at a food market in the Kadikoy district of Istanbul. MUST CREDIT: Bloomberg photo by Erhan Demirtas.
Customers shop at a food market in the Kadikoy district of Istanbul. MUST CREDIT: Bloomberg photo by Erhan Demirtas.

Fueled by an experimental central bank policy that has chased away foreign investors and eroded the lira's value, Turkish inflation accelerated last month to a level last seen in 1998.

Annual inflation reached 83.45% in September, according to official government data, climbing for a 16th month. The jump comes after central bank Governor Sahap Kavcioglu embarked on a series of interest-rate cuts this year, making Turkey an outlier among global monetary authorities, most of which are aggressively raising rates to control soaring prices.

Turkey's central bank said in its latest forecast in July that inflation should peak somewhere between 80% and 90% by October. The government estimates that it'll slow to 65% at the end of this year.

But President Recep Tayyip Erdogan has insisted on even lower interest rates, saying they'll help reduce inflation, an argument that contradicts conventional economic theory -- and which, so far, hasn't been validated by real-world experience, least of all in Turkey.

Erdogan has called for the benchmark rate to be cut to below 10% by year's end, from the current 12%.

"Further rate cuts will inevitably lead to more currency depreciation and higher inflation," Morgan Stanley economists including Alina Slyusarchuk wrote in a report last week.

Turkish officials reject criticism that rampant price increases are a result of monetary policy errors, instead blaming Russia's invasion of Ukraine for a global rally in commodities, including energy and food.

Yet even when the impact from such volatile items is excluded, annual core inflation in Turkey stood at over 66% in August, according to a price index published by state statistics agency TurkStat.

The experimental policies have already pushed inflation above 100% in parts of the country. Consumer prices in Istanbul, Turkey's most populous city, more than doubled from a year earlier, according to a retail price index compiled by the Istanbul Chamber of Commerce, released Saturday, ahead of national data released Monday.

A breakdown of the Istanbul data showed the cost of everything from rent to food rose sharply last month. Attempting to ease the pain for lower-income Turks ahead of elections scheduled for next June, the government has raised the national minimum wage twice in a year.

Kavcioglu has delivered cuts, as sought by Erdogan, at the last two rate-setting meetings, slashing the benchmark by 100 basis points each time. That's left Turkey with the world's deepest negative interest rates when adjusted for inflation, while the lira has lost more than 50% of its value against the dollar in the past 12 months.

The central bank will hold its next rate-setting meeting on Oct. 20, publishing its fourth inflation report this year a week later.

Information for this article was contributed by Emrah Gurel and Suzan Fraser of The Associated Press.

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