Turkey's inflation is the highest of President Recep Tayyip Erdogan's two-decade rule

Istanbul (AFP) - Turkey’s troubled lira on Thursday plumbed new lows after the central bank cut its policy rate for the second straight month despite annual inflation reaching 80 percent and still edging higher.

The central bank lowered its benchmark rate to 12 from 13 percent and blamed skyrocketing consumer prices on external factors such as the global jump in the cost of energy and food caused by Russia’s invasion of Ukraine.

The decision highlights Turkish policymakers’ strong focus on economic growth nine months before a general election that polls show President Recep Tayyip Erdogan is on track to lose.

Turkey has gone the opposite direction of most other central banks worldwide which are raising rates to combat cost of living crises.

The US Federal Reserve and its European peers announced hefty hikes this week.

Erdogan’s unflinching focus on growth at all costs has put the lira under massive pressure and exposed Turkey’s once-vibrant banking sector to new risks.

The lira established a new historic low of 18.41 against the dollar before recovering some its losses after the announcement.

The central bank’s cut was in direct response to data showing that Turkey’s industrial production and retail sales were both starting to slow.

“Since the beginning of July, leading indicators have been pointing to a slowdown in growth due to the weakening foreign demand,” the central bank said.

“Leading indicators for the third quarter continue pointing to loss of momentum in economic activity due to the decreasing foreign demand.”

- ‘I am an economist’ -

Erdogan rejects conventional economics and believes that inflation can be brought under control by cutting interest rates.

“I am an economist,” Erdogan told US television this week.

Turkey's central bank is cutting rates while others are raising them to fight a global spike in inflation

“Currently, there are countries which feel threatened by inflation of even eight or nine percent. We have 80 percent,” he said.

“And in my country, the shelves are not empty in the markets.”

Turkey’s inflation rate is now the highest since 1998.

Erdogan’s two-decade rule was built on a pledge to create a new middle-class and end the corruption and mismanagement that plagued successive governments in the 1980s and 1990s.

But his Islamic-rooted party and its hard-right nationalist allies now face the real possibility of losing their parliamentary majority in next year’s polls.

Erdogan himself is expected to struggle in a likely second round runoff against any of his potential opposition rivals.

The Turkish leader has responded to the economic crisis by radically changing his foreign policy and making up with many of his former rivals in the petrodollar-rich Arab world.

Additional deals with Russia have helped shore up Turkey’s dwindling foreign currency reserves and potentially given Erdogan enough breathing room to ride out the economic storm until June.

- ‘Managed markets’ -

Analysts at Fitch Ratings said they expect the central bank to end its era of unconventional economics and start raising rates after the election.

But there is little concensus on whether the central bank intends to take its rate any lower – and what damage this might inflict.

“The latest note does not rule out further reduction in the policy rate,” ING Bank’s chief Turkey economist Muhammet Mercan noted.

Liam Peach at Capital Economics said he expected the lira to drop to 24 against the dollar by the end of the year.

“Further cuts are likely to be more gradual going forward,” Peach wrote in report.

Others said the Turkish policy rate was so far below inflation that any further moves would need to be massive to have any real economic effect.

“The Turkish central bank’s policy rate really has little real meaning these days, given inflation at 80 percent plus,” said BlueBay Asset Management analyst Timothy Ash.

“The managed markets in Turkey are now aimed at engineering Erdogan’s re-election.”