Shock Rate Cuts Nearing End in Turkey After Biggest Move Yet
Turkey’s central bank lowered its benchmark interest rate for the third time in a row and by a bigger magnitude than forecast.
(Bloomberg) -- Turkey’s central bank lowered its benchmark interest rate for the third time in a row and by a bigger magnitude than forecast, signaling it’s close to ending a series of cuts that have pushed an ultra-loose monetary policy to new extremes.
Led by Governor Sahap Kavcioglu, the Monetary Policy Committee reduced its one-week repo rate to 10.5% from 12% on Thursday, despite annual inflation rocketing past 83%. The MPC said it will consider “taking a similar step at the following meeting and ending the rate-cut cycle,” according to a statement accompanying its decision.
Only Bloomberg Economics correctly predicted the move. Most analysts expected a smaller cut after President Recep Tayyip Erdogan’s explicit calls for rates to come down to single digits by the end of this year. The lira traded little changed after the announcement.
“From an economic standpoint, I’m appalled,” said Cristian Maggio, head of portfolio strategy at TD Securities in London. “From a market angle, nothing moves as the central bank has full control of the FX market in this moment.”
Turkey is an outlier in a world where policy makers are aggressively raising borrowing costs in response to the biggest inflation shocks in decades.
Despite the biggest surge in consumer prices since 1998, the Turkish central bank surprised by resuming cuts in August following a months-long pause, signaling that the threat of an economic slowdown warrants lower rates.
It described the price pressures as “transitory” and blamed them on the global rally in commodity costs, stoked by Russia’s invasion of Ukraine in February.
But even before the war, inflation in Turkey was approaching 50%, following an easing cycle at the end of last year that slashed rates by 500 basis points. Annual price growth last month was nearly 17 times the central bank’s official target.
What Bloomberg Economics Says...
“There are economic risks to complying with Erdogan’s demands. The Turkish central bank’s last easing cycle of 500 basis points in late 2021 culminated in a currency crisis and multi-decade-high inflation rates. There is a risk of a repeat crisis this time around.”
--Selva Bahar Baziki, economist. Click here for more.
At the same time, policy rates in Turkey have grown increasingly disconnected from monetary conditions across much of the economy. A series of what officials call macroprudential measures have engineered a slowdown in lending with regulatory changes, such as the introduction of collateral requirements.
The approach has sought to ensure that credit flows into industries favored by Erdogan, who’s counting on cheap money to increase production and investment as well as create new jobs. The president fired all three of Kavcioglu’s predecessors for taking a line he deemed insufficiently dovish.
Read more: What Erdogan’s Unusual Economic Ideas Mean for Turkey
As he prepares to vie for another term in office, Erdogan is prioritizing growth over price stability and the lira, this year’s worst performer in emerging markets after Argentina’s peso. The Turkish currency has lost over 28% of its value against the dollar so far in 2022.
Alongside a fixation on juicing up the economy, Erdogan believes low rates will bring down inflation, a view that’s at odds with conventional policy and so far not borne out by the evidence in Turkey.
Even so, Erdogan said in October that as long as he is president, “interest rates will continue to be lowered every passing day, week and month.”
The central bank on Thursday reiterated that the main indicators of economic activity were pointing to a slowdown in growth “due to weakening foreign demand,” according to its statement.
“Pressures on the manufacturing industry due to foreign demand and their currently limited impact on domestic demand and supply capacity are being monitored closely,” it said.
--With assistance from , and .
(Updates with economist comment, central bank quote starting in fourth paragraph.)
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