Turkey: Surprise rate cut sends lira to a new record low

Turkey’s lira fell to a record low after the central bank cut its benchmark interest rate on Thursday, unleashing a new bout of market turbulence and reflecting the long shadow cast by President Recep Tayyip Erdogan over monetary policy.The Monetary Policy Committee reduced its key one-week repo rate by 100 basis points to 18%. All but one of the 23 economists surveyed by Bloomberg predicted the central bank would keep rates unchanged at 19%. Turkish inflation unexpectedly climbed to 19.25% last month, pushing the nation’s real interest rate below zero for the first time since October. But Governor Sahap Kavcioglu shifted the bank’s policy focus earlier this month to core inflation, which strips out volatile items like food and energy and is nearly 250 basis points lower than the headline figure, giving him room to heed Erdogan’s calls for lower interest rates.Erdogan promised cheaper borrowing costs and slower inflation starting this month, and not delivering on that could have cost the central bank governor his job. Kavcioglu, who kept the benchmark unchanged for a fifth meeting last month, is the fourth governor of the central bank since 2019, with the president firing his three immediate predecessors. The central bank said the recent increase in inflation was due to transitory factors and removed a pledge to keep its benchmark rate above inflation and maintain tight monetary policy.The bank also highlighted the importance of stripping out the impact of supply shocks on price increases, and focusing on “core inflation developments” in a statement accompanying the rate decision.“The move is still shocking as the initial negative market reaction clearly indicates,” said Piotr Matys, a senior currency analyst at InTouch Capital Markets Ltd. “Starting easing cycle when headline inflation is on track to end this year well above the official forecast and justifying it with a slowdown in the core measures is a very risky move that could prove counterproductive as a weaker lira will have inflationary consequences,” he said.

 

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