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Turkey cuts interest rates again despite 80% inflation

by SuperiorInvest

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Turkey’s central bank surprised markets again with its decision to cut its key interest rate on Thursday, despite the country’s inflation exceeding 80%.

The country’s monetary policymakers opted for a 100 basis point cut, bringing the key weekly repo rate from 13% to 12%. In August, Turkey’s inflation rate was recorded at 80.2%, accelerating for the 15th consecutive month and the highest in 24 years.

Turkey also cut rates by 100 basis points in August and was gradually cutting interest rates by 500 basis points at the end of 2021, triggering a currency crisis.

The central bank’s statement said it “assessed that the updated level of policy is appropriate given the current outlook,” Reuters reported. It said the cut was necessary as growth and demand continued to slow, and also cited “escalating geopolitical risk”.

It said markets should expect “the start of a disinflation process” based on the measures taken, Reuters reported.

The policy direction has long baffled investors and economists, who say the refusal to tighten policy is the result of political pressure from Turkish President Recep Tayyip Erdogan, who has long railed against interest rates and bucked economic orthodoxy by insisting rate cuts were the way to go. reduce inflation.

A months-long campaign to keep cutting rates as Turkey’s trade and current account deficits widen and its foreign reserves dwindle has instead sent Turkey’s currency, the lira, into a multi-year collapse.

Lira lost more than 27% of its value dollar as of today and 80% over the past five years. The currency fell a quarter of a percentage point to trade at a record low of 18.379 per dollar following the announcement of the bank’s rate decision.

Another danger awaits Lira

Many economists predict a further decline in the lira. London-based Capital Economics sees it falling to 24 against the dollar by March 2023.

“The room for further easing is increasingly limited because of the pressure this is putting on the lira and real rates,” Liam Peach, the firm’s chief emerging markets economist, told CNBC. “Turkey has such a large current account deficit and has become dependent on foreign capital inflows to finance it. Turkey’s foreign exchange reserves are so low that the central bank is not really in a position to intervene,” he said.

At some point, confidence will sink so low that these vital inflows are likely to dry up, Peach warned: “Further interest rate cuts make it harder for Turkey to attract these capital flows.”

Erdogan, meanwhile, remains optimistic, predicting that inflation will fall by the end of the year. “Inflation is not an insurmountable economic threat. I’m an economist,” the president said during an interview Tuesday. Erdogan is not an economist by training.

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