Turkey’s central bank cut interest rates by a full percentage point to 18 percent, surprising markets and pushing the lira to a new record low.
The Turkish lira fell to a record low after the central bank cut its benchmark rate on Thursday, unleashing another wave of market turbulence and reflecting President Recep Tayyip Erdogan’s long shadow over monetary policy.
The Monetary Policy Committee cut its key one-week repo rate by 100 basis points to 18%. All but one of 23 economists surveyed by Bloomberg predicted that the central bank would keep interest rates unchanged at 19%.
Turkish inflation unexpectedly rose to 19.25% last month, pushing the country’s real interest rates below zero for the first time since October. But Governor Sahap Kavcioglu earlier this month shifted the bank’s policy focus to core inflation, which takes away volatile items like food and energy and is nearly 250 basis points below the overall figure, giving him room to heed Erdogan’s calls for lower interest rates.
Erdogan promised lower borrowing costs and slower inflation starting this month, and failing to deliver could have cost the central bank governor his job. Kavcioglu, who left the benchmark unchanged for a fifth meeting last month, is the fourth central bank governor since 2019, with the president firing his three immediate predecessors.
The central bank said the recent rise in inflation was due to transient factors and removed a pledge to keep its benchmark interest rate above inflation and maintain tight monetary policy.
The bank also stressed the importance of addressing the impact of supply shocks on price increases and focusing on “core inflation developments” in a statement accompanying the rate decision.
“The move is still shocking, as the initial negative market reaction clearly indicates,” said Piotr Matys, senior currency analyst at InTouch Capital Markets Ltd. justifying it with a delay in core measures is a very risky move that could prove counterproductive, as a weaker lira will have inflationary consequences,” he said.
Erdogan, whose ruling AK party has for decades based its electoral success on rapid economic growth, preaches the unorthodox doctrine that higher interest rates stimulate rather than contain prices. When the economy slumped during the pandemic, support for Erdogan and his party fell away.
What does political interference in monetary policy look like? It’s when inflation rises above the key rate, growth hits record highs, peers begin a tightening cycle – but a central bank decides to cut rates because the president has demanded it.
The only analyst forecasting a rate cut was Ibrahim Aksoy, the Istanbul chief economist at HSBC Asset Management Turkey. Aksoy, who ranks first among Turkish rate decision forecasters in two-year Bloomberg surveys, forecast a 50 basis point rate cut because of the governor’s recent emphasis on core inflation and projected inflation. “In the event of a surprise rate cut, the dollar/lira pair could test the record high at 8.80,” he said before the decision.
Cutting now risks further turbulence for the lira, which has already weakened more than 16% against the dollar since the governor took over on March 20. Investors often criticized the central bank for undoing tightening too quickly and responding too slowly to risk, most recently in August 2018, when the lira lost about a quarter of its value.
The currency fell to a new record low against the dollar, trading 1.1% lower at 8.7537 at 2:25 PM local time.
The Borsa Istanbul 100 Index reversed previous gains and fell as much as 0.9%, trading 0.4% lower as of 2:56 PM. 10-year government bond yields rose the most since the previous central bank governor was ousted on March 22.