Turkey has shocked markets with a 100 basis point interest rate cut despite nearly 80% inflation as the central bank eases policy further to spur growth ahead of next year’s general election .
The bank was expected to keep the rate at 14 percent, which has already pushed Turkish real yields into deep negative territory, according to a poll by broadcaster Bloomberg HT. Instead, policymakers cut the rate to 13 percent, saying they were concerned about the possibility of slowing economic growth.
“Advanced indicators for the third quarter point to a certain loss of momentum in economic activity,” the bank said in a statement on Thursday. “It is important that financial conditions remain favorable to preserve the growth momentum of industrial production and the positive trend in employment in a period of growing uncertainties regarding global growth and escalating geopolitical risk” .
The lira fell about 1% to a low of 18.14 against the US dollar, the weakest level on an intraday basis since a sharp slide late last year.
The currency has fallen more than 25 percent in 2022 as searing inflation and deep concerns about the central bank’s unorthodox monetary policy have sent foreign investors fleeing the market.
Turkey has bucked the trend of other central banks raising borrowing costs to curb global inflation.
Şahap Kavcioğlu, the central bank governor, supports President Recep Tayyip Erdoğan’s unusual theory that high interest rates cause inflation, while mainstream economists subscribe to the opposite view.
“They may have lowered the guidance for a cut amid signs that growth may be slowing,” said Ceyhun Elgin, an economics professor at Istanbul’s Boğaziçi University. “The goal may be to push things forward, for better or for worse, until the election.”
Erdogan’s ruling party has seen its support fall to record lows amid widespread unhappiness with the cost of living in Turkey, less than a year before elections. The president is betting that the weak lira will help manufacturers export more goods and that cheap credit will boost investment and employment.
Kavcioğlu, who took charge of the bank last year, began easing monetary policy in September, cutting rates from 19 percent. This has triggered Turkey’s highest inflation in a quarter of a century. Rates, as of Thursday, had remained unchanged at 14 percent since December.
In recent weeks, the central bank has seen a sharp increase in its foreign exchange reserves, helped by inflows from governments abroad, according to the finance minister.
That may have encouraged Kavcioğlu to cut rates again, giving the bank more cushion if it has to step in to support the lira, Elgin said. But the bank’s coffers remain about $61 billion in the red, when liabilities with other banks are accounted for, according to Goldman Sachs estimates.
“With this decision, Turkey’s central bank abandons any residual pretensions to target inflation and reveals its overall goal of supporting growth. At 80% inflation, however, this recipe only spells disaster,” he wrote Cristian Maggio, head of emerging markets strategy at TD Securities, in a note.
The central bank has an official inflation target of 5% by the end of 2022.