Turkey cuts interest rates despite warnings


Turkey cut interest rates sharply on Thursday, ignoring the warnings of economists and investors that the central bank’s monetary policy will exacerbate already severe inflation and exacerbate the sharp selling of the lira.

The central bank lowered its weekly repurchase rate by 1 percentage point to 15%, marking a drop in President Sahap Kavcioglu’s latest interest rate from 19% in March. The bank stated that many of the factors behind the surge in consumer prices are “out of the control of monetary policy” and that it will “consider” ending the interest rate cut cycle in December this year.

After the decision was made, the Turkish lira fell by about 1% in volatile trading to 10.75 Turkish lira per dollar, and fell to a historical low of just below 11 Turkish lira early in the trading day.

This year the currency has plummeted by about 30%-equivalent to the currency crisis in 2018-because economists worry that low interest rates will exacerbate the inflation spiral, and consumer price growth has reached an annual growth rate of nearly 20%. October.

Paul McNamara, an emerging market investor in London GAM, said: “Why they do this is really puzzling.” McNamara said that as the country recovers from the pandemic, the Turkish economy Many of the fundamentals seem attractive. “The only driver of the lira’s weakness is the policy outlook,” he said.

Despite the surge in inflation, Turkish President Recep Tayyip Erdogan (Recep Tayyip Erdogan) asked the central bank to ease monetary policy. Lower interest rates — and weak currencies — tend to increase inflation because it raises the price of imported goods, creating a vicious circle.

Erdogan held the unorthodox view that high interest rates would lead to rather than moderate inflation, and on Wednesday promised again to rescue Turkey from the “scourge” of high interest rates.

“I’m sorry our friend [from the ruling party] Who defends [high] Interested, but I cannot and will not follow the same path as them,” he said.

Lira against the U.S. dollar line chart shows the Turkish lira plummeting

The central bank on Thursday attributed the rise in inflation to “temporary effects of supply-side factors,” including high global food and energy prices, which are expected to continue into the first half of next year.

It also added that many advanced economies continue to implement monetary policy stimulus measures, partly because the global inflation spike is expected to be fleeting in the medium to long term.

But at a time when many other emerging markets, such as Russia and Hungary, are raising interest rates, Turkey’s loose monetary policy makes the country an outsider. As the world’s most influential central bank, the Fed is also reducing stimulus measures, which puts emerging markets under greater pressure to raise interest rates.

The bar chart of annual changes in consumer prices (%) shows that Turkey's inflation rate is close to 20%

The project on foreign exchange transactions in Turkey’s foreign exchange offices that was published overnight in the country’s official gazette further made the market nervous.

Turkish officials refuted wild speculation on social media that the move was a sign of impending capital controls. They stated that the directive is a small technical change to the previous requirement that citizens show their identity documents at the foreign exchange bureau. They believe that this is actually a liberalization measure, raising the minimum transaction amount for such requirements to $100.

“Foreign exchange transactions are carried out freely between buyers and sellers in the market. This [new] Regulation will never interfere with the free market,” the Ministry of Finance said.

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