Turkish policymakers have returned to the populist policies of yesteryear that pushed the country to the brink in 2018, when inflation surged to 25% and the currency tanked 40%. The ongoing deluge of monetary injections amid negative real rates will cause inflation to spike again, current account deficit to deteriorate further, and currency to fall to new lows:
• The Turkish central bank (CBRT) has slashed policy rates massively over the past year, from 24% to 8.25%. Since inflation is still in the double digits, the real interest rate has slid to a negative 2%, making borrowing very cheap. Moreover, CBRT is also providing copious amount of liquidity to the commercial banks. That, coupled with various newly introduced lending schemes and regulations, has incentivized banks to open the loan spigot. This is manifested in surging bank lending: lira-denominated loans are growing at a decade high rate of 45%, at a time when the pandemic has brought economic activity to a standstill (Chart 1).
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