Turkey’s cenbank shocks with 100-pt rate cut despite soaring inflation

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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 nearly 80% and a monetary tightening trend among its peers worldwide.

The lira dropped more than 1% as the bank took its latest step down the unorthodox policy path advocated by President Tayyip Erdogan.

There had been virtually no signal that another rate cut was planned on Thursday and no economist had predicted it in a Reuters poll, given that inflation has soared to 24-year highs, eating deeply into Turks’ earnings and savings.

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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. That policy easing sparked a historic currency crisis in December that sent inflation soaring.

The rate cuts long urged by Erdogan – who holds sway over the bank after ousting several of its governors in recent years – have left real interest rates deeply negative and have accelerated a cost-of-living crisis for Turkish households.

“I am speechless. It is not the obvious thing to do at all,” said Kieran Curtis, fund manager at Abrdn in London.

The central bank’s policy-setting committee said it needed to act because leading indicators pointed to a loss of momentum in economic activity in the third quarter.

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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 new policy rate “is adequate under the current outlook,” it said, adding: “The recent increase in spread between the policy rate and the loan interest rate is considered to reduce the effectiveness of monetary transmission.”

The currency crisis last year saw the lira fall 44% against the dollar, stoking inflation via imports. The currency has lost a further 27% so far this year while inflation hit 79.60% in July, partly stoked by fallout from the war in Ukraine.

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AGAINST THE GRAIN

With supply constraints, consumer demand and fallout from the war stoking inflation globally, central banks across developed and emerging markets are jacking up interest rates.

Turkey’s inflation rate is among the highest worldwide while its real interest rate, at minus 67%, is among the lowest. Erdogan, who has opposed high rates for years, faces a tough election by mid-2023.

The central bank is pursuing a “lira-isation” strategy as part of Erdogan’s economic program of targeted cheap credit meant to boost exports.

The bank said inflation is driven by the lagged effects of rising energy prices, pricing formations not supported by economic fundamentals, and negative supply shocks.

It repeated that disinflation should begin thanks to steps the bank and other authorities have taken to cool some forms of credit, along with an eventual resolution of the war.

In the Reuters poll, all 14 economists had expected the benchmark one-week repo rate to remain unchanged this week. Only one economist predicted a cut later in the year.

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.

(Additional reporting by Ezgi Erkoyun in Istanbul and Marc Jones in London; Editing by Jonathan Spicer and Gareth Jones)

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