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Turkey to Push On With Lira-Sapping Rate Cuts

Turkey to Push On With Lira-Sapping Rate Cuts

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President Recep Tayyip Erdogan has made it clearer than ever that he wants lower interest rates, and Turkey’s central bank will likely deliver on his demands Thursday at the expense of the currency and price stability.

All but two of 24 economists surveyed by Bloomberg expect Governor Sahap Kavcioglu to cut the benchmark for a third successive meeting. While most forecast a reduction of 100 basis points, a couple see half of that. The two dissenters expect a hold. The projections are in line with a monthly central bank poll of finance and corporate executives.

Bolstering expectations of a cut, Erdogan vowed Wednesday to fight for lower rates, sending the lira plunging to a record low. Evoking Islamic teachings that prohibit usury, he reiterated his unorthodox mantra that high borrowing costs fuel inflation rather than curbing it.

The currency slid as much as 3.1% earlier Thursday, hitting a record low of 10.9680 per dollar. The lira has weakened almost 11% in November, ranking as the worst performer among emerging market currencies tracked by Bloomberg. 

Key Insights

Pressured by the president’s demands, the monetary authority has cut its key rate by 300 basis points to 16% in two consecutive, and unexpected, moves since September. The cuts pushed real yields further below zero as consumer inflation climbed to an annual 19.9% in October. 

Turkey to Push On With Lira-Sapping Rate Cuts

Erdogan told reporters Wednesday the central bank would decide its policy independently, amid accusations of intense political pressure on policy makers. However, not heeding his calls has previously cost central bankers their jobs. Kavcioglu is the fourth governor since 2019, with the president firing his three immediate predecessors and removing committee members who opposed cuts.

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. 

What Analysts Say

“Before Erdogan’s words, I would have felt more comfortable with my below-consensus call” of a 50-basis-point cut, said Cristian Maggio, head of portfolio strategy at TD Securities. “Right now, I’m prepared to see a possibly larger cut.” 

Piotr Matys, a senior currency analyst at InTouch Capital in London, said Erdogan’s reference to the independence of the central bank could be an indication that the policy rate will be left unchanged. “The higher USDTRY goes, the stronger my conviction that the CBRT may refrain from cutting rates further. Experimenting with monetary policy is proving too costly,” he said.

Coming Up

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%.

©2021 Bloomberg L.P.