Turkey shocks with another rate cut despite raging inflation

Turkey shocks with another rate cut despite raging inflation

(Bloomberg) – Turkey’s central bank has cut interest rates again in shock despite inflation at a 24-year high and the lira is trading at a record low.

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The monetary policy committee, headed by Governor Sahap Kavcioglu, cut the benchmark to 12% from 13% on Thursday, surprising most economists polled by Bloomberg. The lira continued its declines after the announcement, trading 0.2% weaker against the dollar as of 3:02 pm in Istanbul.

Turkey is designing an economic strategy that defies mainstream monetary policy. It was already an outlier for much of this year as the world’s central bankers unleashed the most aggressive tightening in decades, and stood out even more this week as countries like Indonesia and Brazil hiked rates.

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

In a statement accompanying its decision, the MPC indicated its bias towards supporting the economy and indicated it has little concern over price stability. “Since the beginning of July, leading indicators have been pointing to a slowdown in growth due to weakening foreign demand,” it said.

President Recep Tayyip Erdogan and his ally Kavcioglu are sticking to an unorthodox playbook that resists raising interest rates to curb inflation. This approach has boosted economic growth at the expense of price stability, making Turkish assets more vulnerable to sell-offs.

In an interview with PBS NewsHour this week, Erdogan said “inflation is not a crippling economic threat.” Price growth in Turkey has skyrocketed to over 80% per year, while the lira has been one of the worst performers in emerging markets this year.

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What Bloomberg Economics Says…

“We expect Turkey’s central bank to cut interest rates further as it looks to boost growth ahead of next year’s general election. The bank will look to offset its easing with alternative tools – and focus on channeling credit growth to curb inflation and support the lira.”

–Selva Bahar Baziki, economist. Click here for more.

Kavcioglu reiterated in a blog post last week that macroprudential measures and strategies to expand the use of the lira are being used to achieve price stability. He is the fourth central bank governor since 2019 after Erdogan fired three of his predecessors.

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

But he warned that such policies, combined with fears of a global recession and rising inflation, are “a very bad mix” for the lira.

The central bank, which says it remains committed to its 5% inflation target, cut interest rates several times under Kavcioglu’s leadership late last year, when annual inflation was already 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 had forecast a 100 basis point fall. “The central bank has made a rate cut against a domestic and EU slowdown.”

(Updates with economists comments from the ninth paragraph)

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