Turkey: Central bank cuts interest rates to 15% – 1 to 11 against the dollar ‘touches’ the pound

Turkey’s central bank has cut interest rates for the third month in a row as President Erdogan has made it clearer than ever that he will not abandon his campaign for lower borrowing costs, despite a weakening currency and rising inflation.

The monetary policy committee, chaired by Sahap Kavcioglu, cut the one-week key refinancing rate by 100 basis points to 15%, according to economists.

Investors were preparing for another cut after Erdogan pledged on the eve of the decision to continue fighting for lower interest rates.

Citing Islamic teachings banning usury, his comments were the latest indication of his unorthodox belief that high interest rates are what are causing inflation rather than reducing it.

Pressed by the demands of the president, Erdogan, the monetary authority has already reduced the interest rate by 300 basis points in two consecutive and unexpected moves, before today.

The Turkish pound, which is under increasing pressure, especially after yesterday’s statements by Erdogan to continue lowering interest rates, is falling again after the decision of the central bank.

The pound is at 10.9765 against the dollar, while it had reached 10.98 against the US currency earlier in the morning, almost 9% lower than last Friday.

The fall in the currency in recent weeks amid worries about further monetary easing was exacerbated on Wednesday by President Erdogan, who said he would continue his battle against interest rates “until the end”.

Erdogan’s insistence on lowering interest rates and frequent changes in central bank leadership, partly due to policy disagreements, have severely damaged the central bank’s credibility over the years, hitting the pound.

The president told reporters that the central bank would make its decision independently, amid accusations of intense political pressure on monetary policymakers.

However, non-compliance with his preferences has cost three central bankers their place.

Kavcioglu is the fourth governor since 2019, with the president dismissing his three immediate predecessors, removing members of the committee who opposed the cuts.

The central bank, which says price pressures are temporary, began sending strong signals in September and went on a relaxing cycle later that month.

Since then, it has reduced the interest rate by 300 basis points, to 16%, and today to 15%.

Aggressive relaxation has shattered any expectations and left Turkey virtually alone in a world of political turmoil.

“Even if interest rates remain unchanged (or increase), only short-term currency relief can be given, as it will depend on the president’s reaction and whether he decides to fire another central bank governor,” said a Capital Economics analyst.

The pound has lost more than 32% of its value since the beginning of the year, and has lost more than 65% in the last three years.