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The Central Bank of Turkey lowered the interest rate by a full percentage point to 18%-a surprise to the market and the lira to a record low.
After the central bank of Turkey lowered its benchmark interest rate on Thursday, the Turkish lira fell to a record low, triggering a new round of market turmoil and reflecting the long-term monetary policy cast by President Recep Tayyip Erdogan. shadow.
The Monetary Policy Committee lowered its key weekly repo rate by 100 basis points to 18%. Of the 23 economists surveyed by Bloomberg, all but one predicted that the central bank will keep interest rates unchanged at 19%.
Turkey’s inflation rate unexpectedly climbed to 19.25% last month, pushing the country’s real interest rate below zero for the first time since October. But earlier this month, Central Bank Governor Sahap Kavcioglu shifted the central bank’s policy focus to core inflation. Core inflation excludes volatile items such as food and energy, which is nearly 250 basis points lower than the overall figure, giving him room to focus on Egypt. Erdogan’s appeal for a rate cut.
Erdogan promised to reduce borrowing costs and slow inflation starting this month, but if it does not materialize, the central bank governor may lose his job. Kavcioglu kept the benchmark unchanged at the fifth meeting last month and was the fourth central bank governor since 2019. The president fired three of his predecessors.
The central bank stated that the recent rise in inflation is a temporary factor and has cancelled its commitments to keep the benchmark interest rate higher than inflation and maintain tight monetary policy.
The bank also emphasized the importance of excluding the impact of supply shocks on price increases, and focused on “core inflation development” in a statement on interest rate determination.
Piotr Matys, a senior foreign exchange analyst at InTouch Capital Markets Ltd., said: “The initial negative market reaction clearly shows that this move is still shocking.” The slowdown in core measures proves that this is a very risky move, which may be It is counterproductive, because a weak lira will have inflationary consequences,” he said.
Erdogan’s ruling party, AK, has built its election success on the basis of rapid economic growth for decades. He preaches the unorthodox doctrine that higher interest rates will stimulate prices rather than depress prices. When the economy fell during the pandemic, support for Erdogan and his party declined.
What is the political intervention in monetary policy? When the inflation rate is higher than the policy rate, growth hits a record high, and peers start a tightening cycle-but the central bank decided to cut interest rates because of the president’s request.
The only analyst predicting a rate cut is Ibrahim Aksoy, the chief economist of HSBC Asset Management Turkey in Istanbul. In a two-year Bloomberg survey, Aksoy, the number one predictor of interest rate decision-making in Turkey, is expected to cut interest rates by 50 basis points because the governor recently emphasized core inflation and expected inflation. “If interest rates are cut unexpectedly, the USD/Lira may test the historical high of 8.80,” he said before making a decision.
The current interest rate cut may cause further turbulence in the lira. Since the governor took over on March 20, the exchange rate of the lira against the US dollar has depreciated by more than 16%. The most recent time was in August 2018, when the lira depreciated by about a quarter.
The currency’s exchange rate against the US dollar fell to a record low and fell 1.1% to 8.7537 at 2:25 pm local time.
The Istanbul Stock Exchange 100 index reversed its earlier gains and fell by as much as 0.9%. As of 2:56 pm, the yield on 10-year government bonds was the largest increase since the previous central bank governor was removed on March 22.
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