Turkey has shocked markets with a 100 basis point rate cut despite inflation nearing 80 percent, as the central bank eases further policy to boost growth ahead of next year’s general election.
The bank was expected to keep interest rates at 14 percent, which has already pushed real Turkish interest rates into deep negative territory, according to a poll by broadcaster Bloomberg HT. Instead, policymakers lowered the rate to 13 percent amid concerns about a potential slowdown in economic growth.
“Third quarter leading indicators point to some loss of momentum in economic activity,” the bank said in a statement on Thursday. “It is important that financial conditions remain supportive to maintain growth momentum in industrial production and the positive trend in employment at a time of mounting uncertainties about global growth and escalating geopolitical risks.”
Against the US dollar, the lira fell about 1 percent to $18.14, its lowest level on an intraday basis since a serious decline late last year.
The currency is down more than 25 percent in 2022 as scorching inflation and deep concerns about the central bank’s unorthodox monetary policy have prompted foreign investors to flee the market.
Turkey has gone against the trend of other central banks raising borrowing costs to curb global inflation.
Central bank governor Şahap Kavcioğlu supports President Recep Tayyip Erdoğan’s unusual theory that high interest rates cause inflation, while mainstream economists endorse the opposite view.
“Instructions for austerity may have come amid signs that growth may be slowing,” said Ceyhun Elgin, an economics professor at Bogazici University in Istanbul. “The goal may be to move things forward, for better or for worse, until the election.”
Erdoğan’s ruling party has seen its support plummet to an all-time low amid widespread discontent with the cost of living in Turkey less than a year before the election. The president is betting that the weak lira will help manufacturers export more goods and that cheap credit will boost investment and jobs.
Kavcioğlu, who took over at the bank last year, began easing monetary policy in September and cut interest rates by 19 percent. That has caused the highest inflation in Turkey in a quarter of a century. Rates had remained unchanged until Thursday at 14 percent since December.
According to the finance minister, the central bank has recorded a sharp rise in its foreign exchange reserves in recent weeks, partly thanks to the influx of governments abroad.
This may have prompted Kavcioğlu to cut interest rates again, giving the bank more buffer if it needs to step in to support the lira, Elgin said. But Goldman Sachs estimates that the bank’s treasury remains about $61 billion in the red when its liabilities to other banks are accounted for.
“With this decision, Turkey’s central bank is dropping all remaining pretense of targeting inflation and revealing its overarching goal of sustaining growth. However, with an inflation rate of 80 percent, this recipe is only disastrous,” Cristian Maggio, head of emerging markets strategy at TD Securities, wrote in a note.
The central bank officially aims for an inflation rate of 5 percent by the end of 2022.