Turkey slashed interest rates on Thursday, sending the lira tumbling as much as 6 percent to a new record low, heightening concerns President Recep Tayyip Erdogan’s fixation on low borrowing costs will worsen already acute inflation.
The central bank cut its one-week repo rate 1 percentage point to 15 per cent, marking the third straight reduction in interest rates under governor Sahap Kavcioglu from 19 per cent at the start of September.
The bank said many factors behind surging consumer prices were “beyond monetary policy’s control” and that it would “consider” ending its cycle of rate cuts this December.
The lira’s decline had eased to 3 per cent by the end of the London trading day. However, the currency has fallen more than 30 per cent this year — on a par with Turkey’s currency crisis in 2018 — as economists fret that low interest rates will worsen an inflation spiral, with consumer price growth having reached an annual pace of almost 20 per cent in October.
“It’s mystifying why they would do this,” said Paul McNamara, an emerging market investor at GAM in London. He said some aspects of Turkey’s economy looked encouraging as the country recovered from the pandemic. “The only driver for a weak lira is the policy outlook,” he said.
Turkey’s central bank has been under intense pressure from Erdogan to loosen monetary policy despite blistering inflation. Lower rates — and a weaker currency — tend to worsen inflation because it increases the price of imported goods, creating a vicious cycle.
Erdogan, who holds the unorthodox view that high interest rates cause, rather than tame, inflation, on Wednesday renewed his pledge to free Turkey from the “scourge” of high-interest rates.
“I’m sorry to our friends [from the ruling party] who defend [high] interest but I cannot and will not walk the same path as them,” he said.
The central bank on Thursday laid the blame for the elevated inflation on “transitory effects of supply-side factors” including high global food and energy prices, which is expected to last into the first half of next year.
It said many advanced economies were continuing to pursue monetary policy stimulus, partially on expectations that the surge in global inflation would prove to be fleeting in the medium to long term.
But Turkey’s loosening of monetary policy leaves the country as an outlier at a time when many other emerging markets are raising rates. Both South Africa and Hungary announced rate rises on Thursday.
The US Federal Reserve, the world’s most influential central bank, is also reducing its stimulus measures, something that has placed emerging markets under more pressure to increase interest rates to attract investment.
Analysts at Barclays said Turkey had entered “uncharted waters”, calling the recent rate reductions “counter-productive”.
Erdogan has faced mounting calls from the opposition and the Turkish business community to set aside his obsession with rate cuts in order to tame inflation and stabilize the currency, whose slide has been eroding standards of living.
“Now STOP, Erdogan!” Kemal Kilicdaroglu, the leader of the country’s largest opposition party, said in a tweet in response to Thursday’s decision and repeated his demand for Turkey to go to elections.
The right-wing IYI party, which has been enjoying growing support in the polls, accused Erdogan of “bankrupting” the country. Source.