Turkey cuts interest rates again despite 80% inflation

The number of Russian tourists to Europe decreased significantly during the summer, but increased in several other destinations, including Turkey (here).

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

The country’s monetary policymakers chose to cut 100 basis points, raising the one-week repo rate from 13% to 12%. In August, Turkey’s inflation rate hit 80.2%, accelerating for the 15th consecutive month and the highest level in 24 years.

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

A statement from Turkey’s central bank stated that it “estimated that the updated level of policy is sufficient given the current expectations,” according to Reuters. It said the cut was necessary as growth and demand continued to slow, and also pointed to “rising geopolitical risks”.

Reuters said that the markets should expect to “begin the process of lowering inflation” on the back of the measures taken.

The policy trend has long stunned investors and economists, who say the refusal to tighten policy is a result of political pressure from Turkish President Recep Tayyip Erdogan, who has long criticized interest rates and turned against economic orthodoxy by insisting that lowering interest rates is the way to go. to reduce inflation.

People browse gold jewelry in a gold shop window at the Grand Bazaar in Istanbul on May 5, 2022 in Istanbul, Turkey. Gold prices rose on Monday as the dollar hovered near recent lows, with investors focused on a key inflation reading in the US that could influence the size of the Federal Reserve’s next rate hike.

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A months-long campaign to continually lower prices as Turkey’s trade and current account deficits ballooned and its foreign exchange reserves plummeted has sent the Turkish currency, the lira, into a multi-year state of collapse.

lira It lost more than 27% of its value in favor of dollar So far, 80% in the past five years. Following the announcement of the bank’s interest rate decision, the currency fell a quarter of a percentage point, trading at a record low of 18.379 per dollar.

More danger to the lira

Many economists expect another drop in the lira. London-based Capital Economics sees it falling to 24 against the dollar by March 2023.

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

At some point, Beech warned, confidence would fall to the point that those vital inflows were likely to dry up, and that “lowering interest rates makes it more difficult for Turkey to attract those capital inflows.”

An electronic board displays exchange rate information at a currency exchange office in Istanbul, Turkey, on Monday, August 29, 2022.

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Meanwhile, Erdogan remains optimistic, and expects inflation to fall by the end of the year. “Inflation is not an insurmountable economic threat. I am an economist,” the president said during an interview on Tuesday. Erdogan is not an economist by training.

Turks will likely continue to struggle as their basic costs of living rise and Russia persists The war in Ukraine It significantly exacerbated global commodity and energy price inflation.

But in the end, “The most pressing problem is the problem of mismanagement of the local economy by the ruling regime,” said Eric Myerson, chief economist at Stockholm-based Handelsbanken Capital Markets.

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