Turkish cenbank stuns markets again with 100 basis-point rate cut, lira hits new low

A logo of the Central Bank of Turkey (TCMB) is pictured at the entrance of the bank’s headquarters in Ankara, Turkey, April 19, 2015. REUTERS/Umit Bektas

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  • Key rate cut by 700 basis points last year
  • Bank points to persistent signs of economic slowdown
  • The lira is weakening above the all-time low it hit in December
  • Inflation at its highest level in 24 years

ISTANBUL, Sept 22 (Reuters) – Turkey’s central bank delivered another surprise 100 basis point rate cut on Thursday, sending the lira plummeting to an all-time low even as inflation surged over 80% and central banks around the world raced in the opposite direction and policy tightening.

The Turkish lira hit a record 18.42 against the dollar, beating levels set during a full-blown currency crisis last December. It fell back to 18.37 by 1223 GMT.

Analysts called the monetary easing unsustainable and fueled by President Tayyip Erdogan’s efforts to lower borrowing costs to boost exports and investment, and forecast further currency depreciation. Continue reading

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Unorthodox interest rate cuts over the past year, combined with rising commodity prices, have pushed inflation to a 24-year high and triggered a cost-of-living crisis for Turks. Continue reading

The central bank justified the move with persistent signs of economic slowdown and reiterated that it expects either disinflation or a slowdown in inflation to begin.

“Leading indicators for the third quarter continue to point to a loss of momentum in economic activity due to falling foreign demand,” his policy committee said.

“It is important that financial conditions remain supportive to maintain the growth momentum in industrial production and the positive trend in employment,” she said, noting increasing uncertainties in global growth and escalating geopolitical risks.

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The rate cuts come at odds with a global tightening cycle that saw the US Federal Reserve raise its benchmark federal funds rate by 75 basis points to a range of 3.00% to 3.25% on Wednesday. The European Central Bank also increased interest rates by 75 basis points this month.


Eleven interest rates forecast by 14 economists in a Reuters poll would be put on hold. One had forecast a 50 basis point cut to 12.50%, while two forecast a 100 basis point cut to 12%.

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Liam Peach, senior emerging markets economist at Capital Economics, said that “the window for easing remains open” but that further cuts were likely to be more gradual.

“The macroeconomic backdrop in Turkey remains poor. Real interest rates are deeply negative, the current account deficit is widening and short-term external debt remains high,” he said.

“It may not take a significant tightening in global financial conditions for investor risk sentiment towards Turkey to fade and put further pressure on the lira,” Peach added.

Last month, in an earlier shock to market expectations, the bank cut its key one-week repo rate (TRIT=ECI) by 100 basis points to 13% to counteract an economic slowdown. It had held the rate constant over the previous seven months. Continue reading

In the second half of last year, it cut interest rates by 500 basis points, in line with unorthodox policies advocated by Erdogan, leaving real interest rates deeply negative, which is a warning sign for investors.

The value of the Turkish lira has halved in the last year, mainly due to interest rate cut policies despite rising prices.

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Timeline of Turkish lira September 2022

Each rate cut weighs more on sovereign risk and the lira, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“As an economist, it’s difficult to comment on this decision because typically higher inflation requires higher interest rates,” she said. “The choice of monetary policy costs management and is certainly not sustainable.”

Erdogan has prioritized exports, manufacturing and investment under an economic program aimed at bringing down inflation by turning chronic current account deficits into a surplus.

That target is all but unattainable this year due to rising energy prices and a global economic slowdown likely to hit Turkey’s exports.

Since last month’s rate cut, the central bank has taken steps to fix the widening gap between the bank’s policy rate and lending rates, causing confusion among both lenders and borrowers. Continue reading

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Additional reporting by Ece Toksabay; writing from Daren Butler; Edited by Jonathan Spicer and Hugh Lawson

Our standards: The Thomson Reuters Trust Principles.

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