Turkey’s central bank lowers interest rates despite inflation

Turkey’s central bank cut its benchmark rate for the third straight time on Thursday, heeding President Recep Tayyip Erdogan’s pleas for cheaper borrowing, even as the currency plummets and the inflation outlook deteriorates.

The monetary policy committee cut its weekly repo rate by 100 basis points to 15%according to the median estimate of a Bloomberg survey of 24 economists.

As most central banks tighten policy, as the global recovery fuels a general rise in prices, Turkey’s decision to cut rates by four percentage points since September has resonated with markets and frustrated investors, who call the policy erratic and unpredictable.

The Turkish lira fell to a record low against the dollar after the decision, erasing earlier gains. Accompanying the decision, the central bank said in a statement that it could find room for a definitive cut in December, although what it described as transitory inflationary pressures now threatens to last until the end of the month. the year.

What appeared to be the light at the end of the tunnel has been dismissed by analysts in a country where Erdogan, a self-proclaimed “enemy of interest rates”, he repeatedly fired central bankers for failing to meet his demands for credit easing. Governor Sahap Kavcioglu is the fourth since 2019 with a president who sacked his three immediate predecessors and removed committee members who opposed the cuts.

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sales cycle

“Today’s decision provides further evidence that the Central Bank simply does not care about the value of the pound and rejects the idea that a substantial devaluation will have seriously negative consequences,” said Piotr Matys, analyst. Senior of InTouch Capital in London.

“The market is unlikely to accept the idea that the expansionary cycle will end in December. This should not be called an expansionary cycle, but rather a dangerous monetary policy experiment that will have serious negative consequences.“.

Investors braced for another drop after Erdogan, on the eve of the decision, promised to ease the interest rate burden for citizens. Referring to Islamic teachings that prohibit usury, the comments were the latest iteration of his unorthodox mantra that borrowing costs cause rather than curb inflation.

The falling lira has kept Turkey’s inflation in double digits since late 2019. Under pressure from the president’s demands, the monetary authority had already cut the rate by a total of 300 basis points in two consecutive and unexpected moves before today’s meeting.

The downward revisions pushed real yields deeper into negative territory, while consumer prices rose 19.9% ​​annually in October. The lira has weakened by more than 30% against the dollar this year, and by more than 15% this quarter alone, the worst performing currency among all major currencies tracked by Bloomberg.

bet on credit

For decades, Erdogan’s dominant AKP party has underpinned its electoral gains on rapid levels of economic growth, often managed by lowering the cost of borrowing, which spurs credit expansion.

As the economy slumped during the pandemic, support for Erdogan and his party also fell to record lows, leading him to redouble their efforts to relaunch growth, even if the rise in prices particularly penalizes their traditional blue-collar base.

The national statistics agency will release third-quarter GDP on November 30 and October inflation on December 3. The Central Bank raised its inflation forecast to 18.4% for the end of this year.

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