Turkey’s Central Bank Delivers Erdogan Another Cut as Lira Burns
Turkey Central Bank Heeds Erdogan With New Rate Cut
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Turkey’s central bank cut its key interest rate for a third consecutive month on Thursday, heeding President Recep Tayyip Erdogan’s renewed demands for cheaper borrowing even as the currency tumbles and inflation outlook worsens.
The Monetary Policy Committee reduced its one-week repo rate by 100 basis points to 15%, in line with the median estimate in a Bloomberg poll of 24 economists and the central bank’s own monthly survey.
While most central banks are talking of tightening policy as the global recovery fuels a surge in prices, Turkey’s decision to slash 4 percentage points off borrowing rates since September has rattled markets and frustrated investors who complain its monetary policy is becoming increasingly erratic and unpredictable.
The lira slumped to a new record low against the dollar after the decision, reversing earlier gains. It was trading 1.4% lower at 10.7738 as of 2:24 p.m. local time.
The central bank signaled in a statement accompanying the decision that it could find room for a final cut in December though what it described as transitory prices pressures were now likely to last into next year.
What appeared to be a signal that the end was in sight was dismissed by analysts in a country where Erdogan, a self-described “enemy of interest rates” has repeatedly sacked central bankers for not yielding to his demands for cheaper borrowing costs. Governor Sahap Kavcioglu is the fourth governor since 2019, with the president firing his three immediate predecessors and removing committee members who opposed cuts.
“Today’s decision provides more evidence that the central bank simply doesn’t care about the value of the lira and rejects the notion that substantial depreciation will have serious negative consequences,” said Piotr Matys, a senior currency analyst at InTouch Capital in London.
“The market is unlikely to buy into the forward guidance that the easing cycle may end in December. It shouldn’t be called an easing cycle but a dangerous experiment in monetary policy that will have serious negative consequences.”
Investors were braced for another cut after Erdogan vowed on the eve of the decision to ease the burden of interest rates on citizens. Evoking Islamic teachings that prohibit usury, the comments were the latest iteration of his unorthodox mantra that high borrowing costs cause inflation rather than curbing it.
Pressured by the president’s demands, the monetary authority had already slashed its policy rate by a total 300 basis points in two consecutive, and unexpected, moves before Thursday’s meeting.
The cuts pushed real yields further below zero as consumer inflation climbed to an annual 19.9% in October. The lira has weakened more than 30% against the dollar this year, and over 15% this quarter alone, the worst performer among all major currencies tracked by Bloomberg.
Erdogan’s ruling AK Party has for decades based its electoral success on rapid levels of economic growth, often driven by reducing borrowing costs to encourage credit expansion. When the economy sank during the pandemic, support for Erdogan and his party also fell to all-time lows, prompting him to redouble efforts to propel growth though rising prices are hurting his traditional working class base the most.
The statistics agency will publish third-quarter gross domestic product growth data on Nov. 30 and October inflation data on Dec. 3. The central bank raised its inflation projections for the end of this year to 18.4%.
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