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Turkey cuts interest rates to 13% despite inflation of 79.6%

"It is important that financial conditions remain favourable to preserve the growth momentum in industrial production and the positive trend in employment," explains the Central Bank of Turkey
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REUTERS/CAGLA GURDOGAN  -   Logo of the Central Bank of Turkey at the entrance of its headquarters in Ankara, Turkey.

Turkey's Central Bank has unexpectedly decided to cut its benchmark interest rate by 100 basis points to 13% from the current 14%, despite inflation reaching a 24-year high of 79.6% in July.

The Ottoman Central Bank had kept the rate stable since last January, after having made four consecutive cuts between September and December 2021.

In its analysis, the institution highlights the growing impact of geopolitical risks on global economic activity, which has led to the downward revision of global growth forecasts and to recession being increasingly assessed as an unavoidable risk factor, while the upward trend in producer and consumer prices continues on an international scale.

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AFP/ADEM ALTAN - Turkish President and leader of the Justice and Development Party (AK Party), Recep Tayyip Erdogan, has been in power for more than a year

In the case of Turkey, the Central Bank notes that the robust growth of the beginning of the year continued also in the second quarter, supported by external demand, while, compared to peer economies, job creation has been stronger and underpinned by structural gains.

As for the inflation rate, which climbed to 79.6% in July, it sees the rise as a response to lagged and indirect effects of rising energy costs as a result of geopolitical developments, effects of price formations that are not supported by economic fundamentals, and strong negative supply shocks caused by higher global energy, food and agricultural commodity prices.

Thus, the Turkish bank expects the disinflation process to start thanks to the measures taken and decisively implemented to strengthen sustainable financial and price stability along with the resolution of the ongoing regional conflict, while leading indicators for the third quarter point to some loss of dynamism in economic activity.

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REUTERS/MURAD SEZER - Turkish lira banknotes

"It is important that financial conditions remain favourable to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainty regarding global growth, as well as rising geopolitical risk," the Central Bank explains.