Turkey: Central Bank resists Erdogan’s call for interest rate cuts | Business and Economic News

After the Central Bank of Turkey rejected President Erdogan’s call for a rate cut and kept the benchmark interest rate unchanged, the Turkish lira rose.

After the central bank of Turkey kept the benchmark interest rate unchanged, the Turkish lira rose, leading the rise among emerging market peers, ignoring President Recep Tayyip Erdogan’s call for interest rate cuts.

As predicted by all 20 analysts surveyed by Bloomberg, after the Monetary Policy Committee maintained its weekly repo rate at 19% for the fifth consecutive month, the currency rose by 1.2%.

The decision reassures traders who fear that despite the worsening inflation outlook, policymakers will still succumb to political pressure and reduce borrowing costs. The increase in consumer prices accelerated to 18.95% in July, almost offsetting Turkey’s real policy interest rate.

The central bank stated that the benchmark interest rate “will continue to be set at a level higher than inflation to maintain a strong anti-inflation effect until a strong indicator shows that inflation has fallen permanently and reaches the medium-term target of 5%”.

However, this move now allows Governor Sahap Kavcioglu to conflict with the President, who holds an unorthodox view that higher interest rates will drive consumer prices up and is seeking to reduce borrowing costs to drive growth. Erdogan fired three former bank governors.

Positive return

“As analysts expect inflation to continue to rise, the upcoming CBRT meeting will continue to bring event risks to Lira traders,” said Simon Harvey, a senior foreign exchange analyst at Monex Europe in London.

Since Kavcioglu took office in March, the currency has depreciated about 16%, exacerbating consumer price increases driven by weak lira, rising commodity prices, and drought that severely affected harvests.

Stimulated by Erdogan’s recent call for lower borrowing costs, the lira rose 0.8% to 8.5633 per dollar in Istanbul at 3:45 pm after falling more than 4% in the past week to a low of 8.6815 per dollar on Wednesday.

Capital Economics Senior Emerging Markets economist Jason Tuwei said: “It is unlikely that the easing cycle will begin before the end of this year, when inflation looks to fall sharply because the impact of the previous lira depreciation begins to fade,” he added, Inflation may remain high at 18-19% in the coming months.

(Updated with analyst comments.)