Turkey slashes interest rates by 150 basis points despite inflation at 83%

Turkish President Recep Tayyip Erdogan attends a news conference after his meeting with the Venezuelan President June 8, 2022 in Ankara.

Adam Altan | AFP | Getty Images

Turkey’s central bank cut interest rates by 150 basis points from 12% to 10.5% for the third straight month on Thursday – despite Turkey’s inflation exceeding 83%.

Market analysts were expecting a 100 basis point cut, so the move surprised many despite the increasing regularity of rate cuts in Turkey. Consumer prices for the country of 84 million climbed to a new 24-year high of 83.45% in September, although many people living in Turkey say prices for basic goods have more than tripled in some cases over the past year to have.

The country’s monetary policy, led by Turkish President Recep Tayyip Erdogan, is based on the pursuit of growth and export competition rather than calming inflation. Erdogan has been vocal about the unorthodox belief that rate hikes increase inflation and not the other way around, and has called rate hikes “the mother of all evils”.

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The policy consistently provokes criticism and bafflement from economists and plays a major role in the dramatic weakening of Turkey’s currency, the lira, which has lost about 28% of its value against the greenback this year.

The lira was roughly unchanged after hitting an all-time low of 18.615 to the dollar following the news. In the last full year, it is down 50% against the greenback. While Turkey’s current account deficit narrowed in August thanks to aid from tourism receipts, it still stands at a hefty $3.1 billion, according to Goldman Sachs data.

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“The lira remains weak, real yields are artificially low, inflation has skyrocketed and the current account remains in deficit. This has caused international investors to exit Turkey’s local currency bond market in recent years,” Daniel Wood, portfolio manager at William Blair Investment Management, wrote in a note on Thursday.

The Turkish government has pursued alternative strategies to strengthen its currency, including programs to encourage lira deposits in banks, selling dollars for lira – which has dwindled its foreign exchange reserves – and sourcing investment and support from wealthy Gulf countries to fund their currency intervention .

Ankara has also remained friendly with Moscow, attracting waves of Russian millionaires and billionaires trying to sidestep Western sanctions.

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Timothy Ash, Senior Emerging Markets Strategist at BlueBay Asset Management, says this is all aimed at winning Turkey’s next general election in July 2023.

“These pro-growth policies could well give Erdogan the election, but they will boost import demand, undermine competitiveness and certainly massively widen the current account deficit,” he said in an email to clients.

But Erdogan remains determined to bring the country’s interest rate down to single digits by the end of this year.

“My biggest fight is against interest rates. My biggest enemy is interest rates. We lowered the interest rate to 12%,” the president said during an event in late September. “Is that enough? It’s not enough.

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