Turkey defies warnings and cuts interest rates

Turkey defies warnings and cuts interest rates

Turkey cut interest rates on Thursday, dropping the lira by as much as 6 per cent to a new record low, raising concerns that fixing President Recep Tayyip Erdogan’s low borrowing costs would exacerbate already acute inflation.

The central bank cut its one-week repo rate by 1 percentage point to 15 percent, the third consecutive reduction in interest rates under Governor Sahap Kavcioglu from 19 percent in early September. The bank said many of the factors behind the rise in consumer prices were “beyond the control of monetary policy” and would “consider” ending its rate-cutting cycle in December.

The lira fell to 3 percent by the end of the trading day in London. However, the currency has fallen by more than 30 per cent this year – compared to Turkey’s currency crisis in 2018 – as economists worry that low interest rates will exacerbate the inflation spiral, with consumer prices already reaching an annual rate of almost 20 per cent in October.

“It’s puzzling why they would do that,” said Paul McNamara, an investor in the emerging market at GAM London. McNamara said some aspects of the Turkish economy looked encouraging as the country recovered from the pandemic. “The only driver of a weak lyre is the political outlook,” he said.

Turkey’s central bank has been under intense pressure from Erdogan to loosen monetary policy despite failure inflation. Lower rates – and a weaker currency – tend to worsen inflation as they increase the price of imported goods, creating a vicious circle.

Erdogan, who has an unorthodox view that high interest rates cause, not tame, inflation, on Wednesday renewed his promise to rid Turkey of the “plague” of high interest rates.

“I am just sorry for our friends [from the ruling party] who defend [high] but I can’t and won’t go the same way as them, “he said.

The central bank blamed “rising supply-side effects”, including high global food and energy prices, on Thursday, which it expected to last until the first half of next year.

It states that many advanced economies continue to stimulate monetary policy, in part based on expectations that rising global inflation will prove transient in the medium to long term.

But the easing of Turkey’s monetary policy leaves the country as an extraordinary position at a time when many other emerging markets are raising rates. Both South Africa and Hungary announced rate increases on Thursday. The U.S. Federal Reserve, the world’s most influential central bank, is also cutting its stimulus measures, something that has put emerging markets under greater pressure to raise interest rates to attract investment.

Barclays analysts said Turkey had entered “unexplored waters”, calling the recent rate cut “counterproductive”.

Pillar chart of annual change in consumer prices (%) shows inflation in Turkey close to 20%

Erdogan has faced growing calls from the opposition and the Turkish business community to put aside his obsession with cutting interest rates to curb inflation and stabilize the currency, whose decline is disrupting living standards.

“Stop, Erdogan!” Kemal Kilicdaroglu, the leader of the country’s largest opposition party, tweeted in response to Thursday’s decision and reiterated his demand that Turkey go to the polls.

The right-wing IYI ​​party, which enjoys growing support in the polls, has accused Erdogan of “bankrupting” the country.

“The reasons that are currently causing the currency crisis are not macroeconomic in themselves. It is a decision-making system that gives Erdogan endless powers, “said Umit Ozlale, one of the party’s vice presidents. “Whatever he wants, it’s done. That is why we are in this crisis. This is a decision-making crisis. “

The troubled market was further disturbed by an item published overnight in the country’s official gazette regarding foreign exchange transactions at Turkish exchange offices.

Turkish officials have dismissed the frantic speculation on social media that the move is a sign of impending capital controls. They said the directive is a small technical change from a previous requirement for citizens to show identification at exchange offices, arguing that it was actually a liberalization measure that raised the minimum transaction amount for such a requirement to $ 100.

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