Turkey Takes Bold Step to Tame Soaring Inflation
A Shift in Monetary Policy
In a surprise move, Turkey’s central bank has slashed its key interest rate by 2.5 percentage points to 47.5%, marking the first rate cut in nearly two years. This bold decision comes as the country grapples with soaring inflation, which has left many households struggling to afford basic necessities like food and housing.
Slowing Inflation Trend
According to the Monetary Policy Committee, the overall inflation trend has flattened in November, with indicators suggesting a decline in December. The committee attributes this slowdown to reduced demand within the country, which has helped to curb inflation.
A History of Unconventional Policies
Turkey’s inflation woes can be traced back to declining foreign reserves and President Recep Tayyip Erdoğan’s unorthodox economic approach. In the past, Erdoğan has advocated for lowering interest rates to combat inflation, a stance that has been widely criticized by economists. This unconventional policy led to a surge in inflation, which peaked at 85% in late 2022.
A Return to Conventional Wisdom
However, under a new economic team, the central bank has adopted a more conventional approach, raising interest rates from 8.5% to 50% between May 2023 and March 2024. This shift in policy has helped to stabilize the economy, paving the way for Thursday’s rate cut.
The Road Ahead
While the rate cut is a positive step, Turkey still faces significant economic challenges. Independent economists estimate that the real inflation rate is much higher than the official figure of 47%. As such, the central bank will need to continue to monitor the situation closely and make adjustments as necessary to ensure that inflation remains under control.
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