Shock Turkey with another interest rate cut despite massive inflation

(Bloomberg) — Turkey’s central bank made another surprise rate cut, despite inflation rising to a 24-year high and with the lira trading at a record low.

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The Monetary Policy Committee led by Governor Sahap Kavcioglu lowered the benchmark to 12% from 13% on Thursday, surprising most economists surveyed by Bloomberg. The lira continued its decline after the announcement and was trading 0.2% weaker against the dollar as of 3:02 pm in Istanbul.

Turkey is mapping out an economic strategy in defiance of the prevailing monetary policy. It has already been an anomaly for most of this year, as the world’s central bankers unleashed the most severe tightening in decades, and it has become even more prominent this week with countries like Indonesia and Brazil raising interest rates.

Similar to August, when Turkey’s central bank ended its seven-month hiatus with an unexpected 100 basis point cut, it cited a “loss of momentum in economic activity” as the rationale for its decision on Thursday.

In a statement accompanying its decision, the MPC hinted at its bias to support the economy and suggested less concern about price stability. “Since the beginning of July, the leading indicators have been pointing to a slowdown in growth due to weak foreign demand,” it added.

President Recep Tayyip Erdogan and his ally Kavcioglu are sticking to an unconventional playbook that resists raising interest rates to contain inflation. This approach encouraged economic growth at the expense of price stability and left Turkish assets more vulnerable to selling.

In an interview with PBS NewsHour this week, Erdogan said “inflation is not a crippling economic threat.” Price growth in Turkey exceeded 80% annually, while the lira is among the worst performers this year in emerging markets.

What Bloomberg Says About Economics…

We expect Turkey’s central bank to cut interest rates further as it looks to boost growth in the run-up to next year’s general elections. The bank will try to balance easing with alternative instruments – focusing on guiding credit growth with the aim of curbing inflation and supporting the lira.”

– Silva sea bass, Economist. Click here for more.

Kavcioglu, in a blog last week, reiterated that macroprudential measures and policies aimed at expanding the use of the lira will be used to stabilize prices. He is the fourth central bank governor since 2019 after Erdogan fired three of his predecessors.

With the ruling party’s popularity teetering at historic lows with the cost of living rising, the government is “very keen to support economic activity,” said Henrik Golberg, macro strategist at Coex Partners Limited in London.

But he cautioned that such a policy, along with fears of a global recession and spiraling inflation, is a “very bad combination” for the lira.

The central bank, which says it remains committed to the 5% inflation target, cut interest rates several times under Kavcioglu’s leadership late last year when annual rate increases were already running in double digits.

“Rate cuts will follow for the rest of this year,” said Tugberk Citilci, head of research at InvestAZ Menkul Degerler AS, who forecast a 100 basis point drop. “The central bank cut interest rates in response to the slowdown at home and in the European Union.”

(Updates with the economist’s comments starting from the ninth paragraph)

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