ANKARA: Turkey’s central bank shocked markets on Thursday by cutting its policy rate by 100 basis points to 13%, saying it needed to keep driving economic growth despite inflation surging to near 80% and a global tightening trend among its peers.
Turkish lira dropped 1% after the policy easing, which no economist had predicted in a Reuters poll given there was virtually no signal it was coming.
The currency touched 18.15 to the dollar, its weakest since Dec. 20, from 17.97 beforehand.
The bank had held its policy rate at 14% for the past seven months after cutting by 500 basis points toward the end of last year, a series of cuts that set off a historic currency crisis and sent inflation soaring to 24-year highs.
The unorthodox monetary policy advocated by President Tayyip Erdogan has left real rates deeply negative and added to deep economic strains on Turkish households.
The central bank’s policy-setting committee said leading indicators pointed to a loss of momentum in economic activity in the third quarter, prompting it to act.
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“It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk,” it said in a statement.
“The updated level of the policy rate is adequate under the current outlook,” it added.
The monetary easing last year triggered the crisis that eroded 44% of the lira’s value against the dollar in 2021, stoking inflation further. The lira is down another 26.5% this year while inflation hit 79.60% in July.
The bank said the rise in inflation was driven by the lagged effects of rising energy prices, pricing formations that are not supported by economic fundamentals and strong negative supply shocks.
“The Committee expects disinflation process to start on the back of measures taken and decisively implemented for strengthening sustainable price and financial stability along with the resolution of the ongoing regional conflict,” the bank repeated.
In a Reuters poll, all 14 economists had expected the benchmark one-week repo rate to remain unchanged this week. The central bank says it is pursuing a “liraisation” strategy as part of Erdogan’s economic programme of targeted cheap credit meant to boost exports.
The bank last month raised its year-end inflation expectation to 60.4%, compared to economists’ median estimate of 70%. It also sees the annual consumer price index (CPI) peaking near 90% this autumn.
With supply constraints, consumer demand and fallout from the war in Ukraine stoking inflation globally, central banks across the developed and emerging markets are jacking up interest rates.
Turkey’s inflation rate is among the highest globally while its real interest rate, at negative 67%, is among the lowest. Erdogan, who has opposed high rates for years, faces a tough election by mid-2023.
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