Turkey’s central bank surprised markets by cutting its key interest rate by 100 basis points, despite inflation running rampant in the country at close to 80%.
In particular, Turkey’s central bank’s benchmark interest rate, which had been at 14% for the past seven months, fell to 13%, following a completely opposite path to that followed by central banks around the world to tame – extremely low – inflation.
In Turkey, inflation rose to 79.6% year-on-year in July, the highest level in 24 years, as the country grapples with rising food and energy costs, as well as long-standing unorthodox – as it is called most analysts – Tayyip Erdogan’s monetary policy strategy.
After today’s announcements, the Turkish lira plunged 0.76% against the dollar, with its exchange rate at 1 to 18.07 of the American currency.
Correspondingly, in the country’s market, the BIST index on the Istanbul Stock Exchange erased its gains and fell to -0.8%.
“It is important that financial conditions remain supportive to maintain growth momentum in industrial production and positive trends in employment, at a time of increasing uncertainties about global growth as well as escalating geopolitical risks,” the central bank said in its decision. Turkey.
Notably, 21 economists polled by Bloomberg all expected the central bank to leave its benchmark interest rate unchanged at 14% for an eighth month.
As the agency notes, the sudden return to monetary stimulus less than a year before the country’s elections shows the determination of the Turkish authorities to follow Tayyip Erdogan’s promise in June that interest rate cuts will continue.
A $10 billion increase in Turkey’s foreign reserves in just two weeks, following transfers of money from Russia to build a nuclear power plant, may have boosted the central bank’s belief that it can withstand the pressures, especially as officials they expect inflation to peak soon.
“Obviously, the Turkish central bank’s increase in foreign reserves over the past month encouraged it to cut interest rates,” Per Hammarlund, head of emerging markets strategy at SEB AB, told Bloomberg after the decision.
“Given the more favorable global environment compared to earlier this year – i.e. falling interest rate expectations – and capital inflows into Turkey from Russia, the rate cut is not expected to cause an immediate crisis of confidence in the lira. However, with inflation expected to rise again in October or November, the pound will be on a bumpy road,” adds Hammarlund.
Source: Capital
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