The only country in the world where the interest rate is falling, and so is inflation

The inflation figures in Turkey are surprising and make it the only country in the world where the interest rate is falling at the same time as inflation.

About two weeks ago the central bank in Ankara decided to lower the interest rate, again, by one and a half percent to 9%. This is a total decrease of 5% in the central bank interest rate since August. This step occurred after last month inflation stood at an annual rate of 85.51% – a record since 1997. Now it seems that the upward trend in inflation has slowed down a bit.

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According to the data of the Turkish Bureau of Statistics, the annual inflation rate in Turkey in November was already 84.39%, After an increase of 2.88% at the monthly level. Although this is a decrease from the month of October, this is still a high rate even compared to the month of September – when the annual rate was 83.45%.

Contrary to the Turkish Bureau of Statistics, the independent institute ENAG put the annual rate at 170.7% – twice the official figure. However, ENAG data also indicate a decrease from 185.3% from the month of October.

The data of the Turkish Central Bank indicate that on an annual level, the main “fuelers” of inflation were transportation (107.03%), food and non-alcoholic beverages (102.55%), as well as furniture and household equipment (92.83%). On the other hand, in the month of November only – the prices of food and non-alcoholic beverages Alcoholics jumped by 5.75%, alcoholic beverages and tobacco rose by 3.19%, hotels, cafes and restaurants by 3.18%, as well as furniture and home equipment by 3.01%.

The banks limit the granting of loans

What may be an explanation for the fact that the central bank’s interest rate is falling, and at least according to official data inflation is not rising, is the limitation of lending by the banks. Especially when the meaning of those interest rate cuts is that the average commercial loan cost dropped from 30% in July to about 16%.

The top economists in Turkey, who understand very well that low interest rates “fuel” inflation, led to the instruction to the banks that they will indeed allow loans on relatively favorable terms, the cheapest in the world in fact – but only after careful screening.

That Turkish dependence on exports led the regulators to order banks to prioritize lending to exporters and small businessmen, who make up almost three quarters of the labor market. Turkish Central Bank data show that loans in Turkish lira to small businesses increased tenfold in the first ten months of the year, while loans to large businesses increased sevenfold.

On the other hand, the data of the Turkish Central Bank indicate that loans to small and medium businesses grew this year to a record amount of 35 billion dollars – almost half of all commercial loans.

The fourth worst food inflation in the world

Those who are hurt the most by all of Erdogan’s actions are his citizens. The World Bank’s analysis of IMF data shows that food inflation in Turkey, which stands at an annual rate of 99%, is the fourth most severe in the world. However, in this case, Turkey was also hit by a prominent external factor: Russia’s invasion of Ukraine, producer of 10% of all wheat exported in the world before the war, sent the whole world into a spin.

The same spiral is reflected, of course, not only in food prices – but also in the jump in energy prices. The same trend greatly affects Turkey, because it is completely dependent on oil and natural gas imports. Those imports meant that the trade deficit continued to soar in November. While exports increased by 1.9% to 21.9 billion dollars, imports increased by 14% to 30.7 billion dollars. The trade deficit of $8.8 billion represents a 62% increase compared to the corresponding period last year. On the contrary, the trade deficit since the beginning of the year stands at 99.9 billion dollars – a jump of 154%.

The decision in the Turkish presidential elections in June, which greatly disturbs Erdogan, may come from the unemployment data. According to the Turkish Bureau of Statistics, after a consistent decrease in the unemployment rate from 11% in March to 9.8% in August, in September there was an increase again to 10.1%. However, a quarterly analysis shows that the unemployment rate in Turkey dropped from 10.7% in the second quarter of 2022 to 10% in the third quarter.

The GDP contracted for the first time since the outbreak of the corona virus

About three weeks ago, the credit rating agency Moody’s raised the Turkish GDP growth forecast until the end of the year from 4.5% to 5.3% – while leaving the expectations for 2023 and 2024 at 2% and 3%, respectively. According to Turkey’s official data, the annual growth rate was 7.6% in the months of July-September.

About two weeks ago, the Organization for Economic Co-operation and Development (OECD) aligned with Moody’s and also published growth forecasts until the end of 2022 of 5.3%. However, unlike Moody’s – in the case of the OECD, this is a slight decrease from 5.4%. At the same time, they put the expectations for 2023 and 2024 at 3% and 3.4%, respectively. The OECD justified the reduction in growth forecasts for 2022 by saying that exports (Turkey’s growth engine) are likely to be harmed by “weak demand and the ongoing geopolitical uncertainties”. The analysts of Reuters are more skeptical, and put the inflation expectations until the end of 2022 at 5%.

The slowdown in demand has already started to affect Turkey. According to Ankara’s official data, Turkey’s economy slowed in the third quarter – and grew by 3.9% compared to last year. In addition, the Turkish GDP shrank by 0.1% from the previous quarter, for the first time since the outbreak of the Corona epidemic which had a heavy impact on the second quarter of 2020. According to estimates, the slowdown in the Turkish economy will worsen in the fourth quarter.


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