Onur Dogman | Sopa Images | Lightrocket | Getty Images Turkey’s central bank once again surprised markets with its decision on Thursday to cut its key interest rate, despite inflation in the country exceeding 80 percent. The country’s monetary policymakers opted for a 100 basis point cut, raising the key one-week repo rate from 13% to 12%. In August, Turkish inflation was recorded at 80.2%, accelerating for the 15th consecutive month and the highest level in 24 years. Turkey also cut interest rates by 100 basis points in August and gradually cut rates by 500 basis points at the end of 2021, triggering a currency crisis. In a statement the central bank said it “assessed the updated policy level to be adequate under the current outlook,” according to Reuters. He said the cut was necessary as growth and demand continued to slow and also cited “escalating geopolitical risk”. It said markets should expect “the deflation process to begin” based on the measures taken, Reuters reported. The direction of policy has long surprised investors and economists, who say the refusal to tighten policy is a result of political pressure from Turkish President Recep Tayyip Erdogan, who has long opposed interest rates and turned against economic growth. orthodoxy insisting that lowering interest rates is the way. to reduce inflation. The months-long campaign to keep cutting interest rates as Turkey’s trade and current account deficits narrow and its foreign exchange reserves deplete has instead sent Turkey’s currency, the lira, into a multi-year slump. The pound has lost more than 27% of its value against the dollar year to date and 80% over the past five years. After the announcement of the bank’s interest rate decision, the currency fell by a quarter of a percentage point, trading at a record low of 18.379 per dollar.
More risk for the pound
Many economists predict a further fall in the pound. London-based Capital Economics estimates it will fall to 24 against the dollar by March 2023.
“The scope for further easing is increasingly limited because of the pressure this is putting on the pound and real interest rates,” Liam Peach, the firm’s senior emerging markets economist, told CNBC. “Turkey has such a large current account deficit and has become dependent on foreign capital inflows to finance it. Foreign reserves in Turkey are so low that the central bank is not really in a position to intervene,” he said.
At some point, confidence will fall so low that these vital inflows will likely dry up, Peach warned: “Further interest rate cuts make it more difficult for Turkey to attract these capital flows.”
Erdogan, meanwhile, remains upbeat, predicting that inflation will ease by the end of the year. “Inflation is not an insurmountable economic threat. I’m an economist,” the president said during an interview Tuesday. Erdogan is not an economist by training.
