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Turkey bucks mainstream monetary policy with interest rate cut

By Jonna Lorenz
President of the Republic of Turkey Recep Tayyip Erdogan speaks at the U.N. General Assembly's 77th session General Debate at the United Nations Headquarters in New York on Tuesday. Photo by John Angelillo/UPI | <a href="/News_Photos/lp/582231cc0ffd8eb8c97220a5459be65a/" target="_blank">License Photo</a>
President of the Republic of Turkey Recep Tayyip Erdogan speaks at the U.N. General Assembly's 77th session General Debate at the United Nations Headquarters in New York on Tuesday. Photo by John Angelillo/UPI | License Photo

Sept. 22 (UPI) -- Turkey surprised global economists with another cut to its key interest rate Thursday, the same day that Bank of England announced a half-point increase to its bank rate amid raging inflation.

Turkey's Monetary Policy Committee lowered the benchmark interest rate 1 percentage point to 12%.

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Inflation in the country shot to 80.2% in August, its highest level in 24 years, and the country's currency, the lira, is trading at a record low, Bloomberg reported.

The Central Bank of the Republic of Turkey made a similar cut in August. President Recep Tayyip Erdogan and Sahap Kavcioglu, governor of the central bank, have taken an approach favoring economic growth at the expense of price stability.

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"Since the beginning of July, leading indicators have been pointing to a slowdown in growth due to weakening foreign demand," the monetary committee said in a statement.

Over the past five years, the lira has lost 80% of its value in relation to the dollar, CNBC reported.

Further interest rate cuts could come ahead of next year's election.

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"Given upcoming elections, a disproportionate focus will remain on propping up short-term economic growth, putting further upward pressure on inflation as well as the lira," Erik Meyersson, a senior economist at Handelsbanken Capital Markets said, according to CNBC.

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"The Turkish government's ability to avert a deeper financial crisis may appear to be a success, but its more important failure is the slow strangulation of the country's economic potential."

Turkey's unorthodox move comes as Bank of England raised its base rate by half a percentage point to 2.25% on Thursday. Inflation in Britain stood at 9.9% in August. BOE expects inflation to peak at just under 11% in October.

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Economists were expecting the bank to raise its base interest rate by 75 basis points. The smaller-than-expected increase was approved as the bank forecast a 0.1% contraction in gross domestic product in the third quarter, signaling that the British economy already may be in a recession.

A recession is typically identified by two consecutive quarters of decline. GDP fell 0.1% in the second quarter.

Thursday's increase marked the seventh consecutive rise since December, when the Bank of England became one of the first central banks to begin rate increases to fight inflation.

It came a day after the Federal Reserve voted to raise the federal funds rate 75 basis points to the range of 3% to 3.25%

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