Turkish lira weakens ahead of central bank meeting on interest rates

Turkey’s lira fell against the dollar ahead of a central bank decision on interest rates.

The central bank’s monetary policy committee is holding a monthly meeting in Ankara to decide whether to lower its benchmark rate of 19 percent after inflation slowed unexpectedly.

The lira was trading down 0.4 percent at 8.63 per dollar at noon local time in Istanbul. The central bank was due to announce its decision at 2 p.m.

The central bank will leave interest rates at 19 percent, according to a Reuters poll of economists published on Friday. All 19 respondents predicted no change.

On June 1, Turkish President Recep Tayyip Erdoğan called on the bank’s new governor to reduce borrowing costs in July or August. The lira dropped to a record low beyond 8.8 per dollar after he spoke. Two days later, the statistics office said inflation slowed to 16.6 percent in May from 17.1 percent in April. Most economists had expected inflation to accelerate.

Erdoğan, who says higher interest rates are inflationary, has sacked three central bank governors since July 2019. His view contradicts with traditional economic theory, which states that rate hikes can be used as an effective tool in controlling inflation.

Governor Şahap Kavcıoğlu, hired by Erdoğan in March, has vowed to keep interest rates at above realised and expected inflation to achieve a goal of reducing price increases to an annual 5 percent. He has stated that rate cuts are not imminent.

Inflation is expected to slow to 14.4 percent by the end of the year, according to the central bank’s June survey of finance industry professionals and business leaders. Expectations have deteriorated from 13.8 percent in May. The central bank’s year-end forecast is 12.2 percent.

The central bank will wait until the fourth quarter to cut rates, according to the Reuters poll.

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