ISTANBUL: Turkey’s central bank made another astonishing 100 basis-point rate cut on Thursday, sending the lira to an all-time low even as inflation topped 80% and central banks globally Run in the opposite direction and tighten the policy.
The Turkish lira touched a record high of 18.42 against the dollar, surpassing the level reached during the full-blown currency crisis last December. It jumped back to 18.37 by 1223 GMT.
Analysts called monetary easing volatile and driven by President Tayyip Erdogan’s effort to reduce borrowing costs to reduce exports and investments, and they predicted further currency depreciation.
Unconventional rate cuts over the past year, coupled with rising commodity prices, have sent inflation to a 24-year high and created a cost-of-living crisis for Turks.
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The central bank justified the move, citing continued signs of an economic slowdown, and reiterated that it expected a fall in the rate of inflation, or a fall in the rate of inflation.
“Key indicators for the third quarter are pointing to a loss of momentum in economic activity due to a slowdown in foreign demand,” its policy committee said.
“It is important that financial conditions remain supportive to sustain the growth momentum of industrial production and the positive trend in employment,” it said, pointing to rising uncertainties in global growth and rising geopolitical risks.
The rate cut comes against a global tightening cycle, with the US Federal Reserve raising its benchmark overnight interest rate by 75 basis points on Wednesday in the range of 3.00%-3.25%. The European Central Bank also raised its key rates by 75 basis points this month.
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Negative Yields, Weak Lira
A Reuters poll forecast rates would put eleven out of 14 economists on hold. One predicted a 50 basis-point cut to 12.50%, while two predicted a 100 basis-point cut to 12%.
Liam Peach, senior emerging market economist at Capital Economics, said the “window of easing remains open” but further cuts are likely to be more gradual.
“The macro background in Turkey remains poor. Real interest rates are very negative, the current account deficit is widening and short-term external debt remains large,” he said.
“It may not lead to a significant tightening of global financial conditions for investor risk sentiment towards Turkey and put further pressure on the lira,” Peach said.
Last month, in a blow to market expectations, the bank reduced its key one-week repo rate by 100 basis points to 13% to kick-start the cooling economy. It had kept the rate stable for the last seven months.
Late last year it lowered the rate by 500 basis points in line with an unconventional policy advocated by Erdogan, leaving real rates deeply negative, a red flag for investors.
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Despite rising prices, the Turkish lira has halved in value last year due to the policy of cutting rates.
Swissquote Bank senior analyst Ipek Ozkardeyskaya said each rate cut has a greater impact on the country’s risks and the lira.
“As an economist, it is difficult to comment on this decision, because in general, higher inflation requires higher interest rates,” she said. “Freestyle monetary policy management costs, and is certainly not sustainable.”
Erdogan has prioritized exports, production and investment under an economic program that aims to reduce inflation by turning the old current account deficit into a surplus.
The target is unachievable this year due to a surge in energy prices and a global economic slowdown, which is likely to impact Turkey’s exports.
Since last month’s cut, the central bank has taken steps that are meant to address the widening gap between the bank’s policy rate and lending rates, creating confusion for lenders and borrowers alike.