(Bloomberg) – Turkey’s central bank has cut interest rates sharply again, despite inflation at its highest level in 24 years and the pound trading at a record high.
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The Monetary Policy Committee headed by Governor Sahap Kavcioglu cut the benchmark to 12% from 13% on Thursday, surprising most economists polled by Bloomberg. The lira extended its declines after the announcement and was trading 0.2% weaker against the dollar at 3:02 p.m. in Istanbul.
Turkey is developing an economic strategy in defiance of traditional monetary policy. That has already been an outlier for much of this year, as the world’s central bankers unleashed the most aggressive tightening in decades, and stood out even more this week as countries like Indonesia and Brazil raised their rates.
As in August, when Turkey’s central bank ended a seven-month hiatus with an unexpected 100 basis point cut, it cited “loss of momentum in economic activity” as justification for its decision on Thursday.
In a statement accompanying its decision, the MPC alluded to its tendency to support the economy and suggested little concern about price stability. “Since early July, leading indicators point to slower growth due to weakening foreign demand,” he said.
President Recep Tayyip Erdogan and his ally Kavcioglu are sticking to an unorthodox playbook of resisting rate hikes to contain inflation. This approach encouraged economic growth at the expense of price stability and made Turkish assets more vulnerable to sales.
In an interview with PBS NewsHour this week, Erdogan said “inflation is not a crippling economic threat.” Price growth in Turkey has exceeded 80% annually, while the lira is among the worst performers this year in emerging markets.
What Bloomberg Economics says…
“We expect Turkey’s central bank to cut the rate further as it seeks to boost growth ahead of next year’s general elections. The bank will try to balance its easing with alternative tools, focusing on steering credit growth with the aim of curbing inflation and supporting the lira.
–Selva Bahar Baziki, economist. Click here to find out more.
Kavcioglu, in a blog post last week, reiterated that macroprudential measures and policies aimed at expanding the use of the lira will be used to achieve price stability. He is the fourth central bank governor since 2019 after Erdogan sacked three predecessors.
With the ruling party’s popularity hitting historic lows as the cost of living soars, the government is “very keen to support economic activity”, said Henrik Gullberg, macro strategist at Coex Partners Limited. in London.
But he warned that such a policy, combined with fears of a global recession and runaway inflation, is “a very bad mix” to read.
The central bank, which says it remains committed to its 5% inflation target, repeatedly cut rates under Kavcioglu late last year when annual price increases were already at two. figures.
“Rate cuts will follow for the rest of this year,” said Tugberk Citilci, head of research at InvestAZ Menkul Degerler AS, who predicted a 100 basis point cut. “The central bank cut rates against a slowdown at home and in the EU.”
(Updates with economists’ comments from the ninth paragraph)
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