Turkey’s central bank stuns markets again with 100 basis point rate cut, lira drops to new low

Turkey’s central bank stuns markets again with 100 basis point rate cut, lira drops to new low

Written by Ali Kucukcjokman and Ezji Erkoyun

ISTANBUL (Reuters) – Turkey’s central bank made another surprise rate cut of 100 basis points on Thursday, sending the lira to an all-time low, even as inflation soared above 80% and as central banks globally raced in the opposite direction. and tighten policy. Policies.

It touched a record high of 18.42 against the dollar, surpassing the level reached during the full currency crisis last December. He returned to 18.37 by 1223 GMT.

Analysts described monetary easing as unsustainable and motivated by President Recep Tayyip Erdogan’s efforts to lower borrowing costs to increase exports and investment, and predicted further currency depreciation in the future. [L8N30T3FS]

Unconventional interest rate cuts over the past year, along with soaring commodity prices, have pushed inflation to its highest level in 24 years and sparked a cost-of-living crisis for Turks.

The central bank justified the move by citing continued indications of an economic slowdown, and reiterated that it expects a decline in inflation, or a slowdown in the rate of inflation.

Its policy committee said, “The leading indicators for the third quarter continue to point to a loss of momentum in economic activity due to lower external demand.”

“It is important that financial conditions remain supportive to maintain the growth momentum in industrial production and the positive trend in employment,” the report said, noting growing uncertainties about global growth and escalating geopolitical risks.

Infographic – A widening gap A widening gap

https://graphics.reuters.com/TURKEY-CENBANK/RATES/zgvombzaxvd/chart.png

The rate cuts run counter to the global tightening cycle that has seen the US Federal Reserve raise its benchmark interest rate by 75 basis points on Wednesday to the 3.00%-3.25% range. The European Central Bank also raised key interest rates by 75 basis points this month.

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Negative productivity rates, weak lira

And 11 of 14 economists polled by Reuters expected interest rates to remain unchanged. One expected a 50 basis point cut to 12.50%, while two expected a 100 basis point cut to 12%.

Liam Beach, chief emerging markets economist at Capital Economics, said that “the easing window is still open” but that additional cuts are likely to be more gradual.

“Turkey’s overall background is still weak. Real interest rates are very negative, the current account deficit is widening, and short-term foreign debt is still large,” he said.

“It may not take a significant tightening of global financial conditions for investor sentiment towards risky Turkey to deteriorate and add further downward pressure on the lira,” Beach added.

Last month, in an earlier shock to market expectations, the bank lowered its one-week key repo rate by 100 basis points to 13% to head off a slowdown in the economy. The rate has been left flat for the previous seven months.

In the latter part of last year, it cut the price by 500 basis points in line with an unorthodox policy advocated by Erdogan, and left real rates very negative, a warning to investors.

The Turkish lira halved in value last year largely due to the policy of cutting interest rates despite the price hikes.

Chart – Turkish lira schedule September 2022

https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnkkmlvq/Turkish%20lira%20timeline%20September%202022.PNG

Ipek Ozkardeskaya, chief analyst at Swissquote Bank, said that each rate cut has a greater impact on the country’s and the lira’s risks.

“As an economist, it is difficult to comment on this decision, because usually higher inflation requires higher interest rates,” she said. “Free monetary policy management costs, which is certainly not sustainable.”

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Erdogan has prioritized exports, production and investments as part of an economic program aimed at reducing inflation by turning chronic current account deficits into a surplus.

This goal is out of reach this year due to rising energy prices and a global economic slowdown that is likely to hurt Turkey’s exports.

Since the cut last month, the central bank has taken steps aimed at addressing the growing gap between the bank’s policy rate and lending rates, which has created confusion for lenders and borrowers alike.

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