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Turkey’s central bank cuts big rates amid 80% inflation; The currency may further deteriorate

ISTANBUL: Turkey’s central bank cut another huge interest rate on Thursday despite eye-popping inflation above 80 percent, as the lira sank to record lows in a reversal from the global economy raising rates to control prices.

The Central Bank of the Republic of Turkey cut the benchmark rate by 1 percentage point to 12 percent. The lira was trading around 18.38 against the dollar, further weakening from the previous record of 18.36 in December.

The devaluation of Turkey’s currency could exacerbate financial worries among residents who have seen their purchasing power erode during the country’s ongoing economic shocks.

Turkey followed President Recep Tayyip Erdogan’s unorthodox belief that high interest rates lead to high inflation, reducing borrowing costs despite consumer prices rising 80.21 percent in August from a year earlier.

Traditional economic thinking says that raising interest rates fights inflation.

“Inflation is not a crippling economic threat,” Erdogan said in an interview with PBS NewsHour this week. “Currently countries are threatened by inflation rates of 8 percent and 9 percent In our country this rate is 80 percent.” He said Turkey will bring inflation under control after the New Year and supermarkets are well stocked.

Central banks around the world are taking the opposite tack from Turkey, raising rates aggressively to target rising inflation.

The US Federal Reserve raised rates by a large three-quarters of a point for the third time in a row on Wednesday, the Swiss National Bank’s biggest increase in key interest rates on Thursday.

The Bank of England rose a small half-point as other banks from Europe to Canada moved quickly to rein in rising prices.

Turkish government figures released this month showed annual inflation was the worst among a group of 20 major economies, but independent experts say inflation is actually much higher.

Critics also say the independence of Turkey’s central bank and official statistics institute has been undermined under the presidency.

The currency hit record lows last year as the central bank cut interest rates from 19 percent.

When it finally hit 18.36 against the dollar, Erdogan announced extraordinary measures that he claimed would protect the lira.

The government encouraged people to exchange their dollars for lira and put them in a deposit account that would pay interest rates against the dollar and the lira’s depreciation.

Although the lira rebounded to a high of 11.09 after the announcement, it has declined steadily this year.

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