Turkish central bank shocks investors by slashing rates, lira dives

Turkey’s central bank cut the benchmark interest rate by 2 percentage points to 16 percent, shocking investors, after President Recep Tayyip Erdoğan sacked three top monetary policymakers a week ago who had resisted reductions.

The lira dropped to as low as 9.48 per dollar, a new all-time low. It was trading down 2.3 percent at 9.42 against the U.S. currency in the mid-afternoon local time.

The central bank said it was lowering the benchmark rate from 18 percent because an acceleration in inflation to almost 20 percent was “transitory” and tight monetary policy had started to have a higher than expected impact on commercial loans. The rate reduction was double the 1 percentage point cut predicted by most economists.

Erdoğan, who has fired three central bank governors since the summer of 2019, has pressured the institution to cut interest rates even after inflation strayed markedly from targets. Current governor Şahap Kavcıoğlu, hired in March, lowered rates to 18 percent from 19 percent last month, unnerving investors. Erdoğan sacked three of the seven members of the bank’s Monetary Policy Committee last Thursday.

“The Central Bank of Erdoğan manages to surprise the markets once again,” said Wolfango Piccoli, co-president and director of research at Teneo Intelligence.

“Insane monetary policy experiment going on in Turkey at present,” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments. “It feels like the lira and inflation will suffer the consequences.”

Consumer price inflation in Turkey accelerated to 19.58 percent in September, the highest level in major emerging markets after crisis-hit Argentina, from 19.25 percent the previous month. The rate stands at almost four times the central bank’s official target.

The central bank said it would “continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved”.  

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