Turkey shocks markets with interest rate cut close to 80% despite inflation

Turkish President Tayyip Erdogan arrives for a NATO summit in Madrid, Spain, on June 29, 2022.

Sweet Nacho | Reuters

Turkey’s central bank shocked markets on Thursday with a cut in its policy rate, despite inflation in the country nearing 80%.

The country’s currency, the lira, fell 0.9% against the dollar, trading at more than $18.1 against the greenback following the news, nearing a record low.

The country’s key policy rate, which has stood at 14% for the past seven months, was cut to 13% in a complete mismatch with what other central banks around the world are doing.

“Another crazy move,” said Timothy Ash, senior emerging markets strategist at BlueBay Asset Management.

“Insane with 80% inflation and CBRT cuts still soaring, against expectations by 100 basis points to just 13%,” he wrote on Twitter, referring to Turkey’s central bank by the acronym.

“Ridiculous move. They clearly have money in their pockets from Russia and the Gulf and think they can cut interest rates + hold the lira.”

Analysts did not expect a price change; the decline of the central bank has taken the markets by surprise. The major BIST index broke session gains to trade 0.8% lower after the decision, according to Reuters data.

Turkey’s inflation for July rose an eye-watering 79.6% year-on-year, its highest in 24 years, as the country grapples with rising food and energy costs and President Recep Tayyip Erdogan’s long-running unorthodox monetary policy strategy.

Rising consumer prices have hit the population of 84 million hard, and few have hopes for near-term improvement thanks to the war between Russia and Ukraine, high energy and food prices and a deeply weakened lira.

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