Turkish central bank shocks markets by lowering main rate 

Turkish central bank shocks markets by lowering main rate 

Turkey’s central bank shocked markets on Thursday by cutting its main interest rate by 100 basis points to 13%, saying it needed to keep driving economic growth despite inflation hitting nearly 80% and a monetary tightening trend among its peers worldwide.

The lira dropped as much as 1.2% as the bank took its latest step down the unorthodox policy path advocated by President Recep Tayyip Erdogan that aims to provide targeted cheap credit to help boost Turkish exports.

There had been virtually no signal that another rate cut was in the works and no economist polled by Reuters had predicted one, given that inflation has soared to 24-year highs, eating deeply into Turks’ earnings and savings.

The bank had held its main rate at 14% for the past seven months after cutting it by 500 basis points toward the end of last year.

That policy easing sparked a currency crisis in December that sent inflation soaring.

The rate cuts long urged by Erdogan – who holds sway over the bank after ousting several of its governors in recent years – have left real interest rates in deeply negative territory and have accelerated a cost-of-living crisis for Turkish households.

Analysts expressed dismay at the decision.

“I am speechless. It is not the obvious thing to do at all,” said Kieran Curtis, fund manager at Abrdn in London.

The central bank’s policy-setting committee said it needed to act because leading indicators pointed to a loss of economic momentum in the third quarter.

“It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk,” the bank’s committee said.

“Accordingly, the committee has decided to reduce the policy rate by 100 basis points, and has assessed that the updated level of policy rate is adequate under the current outlook,” it added. [Reuters]

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