Turkey’s central bank defied warnings from the business world and opposition parties by slashing its main interest rate despite rising inflation and an ailing currency.
Bucking the global trend at a time when both developed economies and other emerging markets are adopting a hawkish stance, the bank lowered the cost of borrowing by a full 2 percentage points — a far deeper cut than the markets expected.
The lira, which had already lost about 20 per cent of its value against the dollar this year prior to the announcement, fell a further 2 per cent, hitting a fresh low of TL9.47 to the US dollar.
The decision to lower the one-week repo rate to 16 per cent took place in the shadow of President Recep Tayyip Erdogan, a notorious opponent of high interest rates, who has asserted greater control over the nominally independent central bank in recent years.
Erdogan, whose view that high interest rates lead to inflation runs counter to established economic orthodoxy, has increasingly meddled in monetary policy as he consolidates his control over the Turkish state.
He has pushed for rate cuts even at the cost of soaring inflation and turmoil in the financial markets.
But the central bank is facing growing pressure from the country’s opposition, which has been buoyed by Erdogan’s declining poll ratings, to act in line with its independent mandate.
Hours before Thursday’s announcement, Republican People’s party leader Kemal Kilicdaroglu reiterated a previous warning to the central bank that it must act in the public interest. “Dear bureaucrats,” he wrote on Twitter. “When taking decisions today, your guiding principle should be nothing but the welfare of our nation.”
In the lead-up to the announcement, Omer Koc, one of Turkey’s top business tycoons, and the Turkish business association Tusiad issued public warnings of the harm being done by the spiralling exchange rate and runaway price rises.
The decision to cut the interest rate for a second month in a row pushes the country’s real interest rate deep into negative territory, once annual inflation that stood at almost 20 per cent in September is taken into account.
The move risks piling fresh pressure on the crisis-ridden lira and is likely to further deter vital foreign capital at a time when international investment in Turkey is close to its lowest point in the past 20 years.
Viktor Szabo, an emerging markets portfolio manager at Abrdn, said that “the worst-case scenario” for the credibility of the central bank had played out, adding: “There’s no one left there to stand up to Erdogan.”
Even soaring yields on Turkey’s lira-denominated government debt are unlikely to tempt many foreign investors back to Turkish assets, Szabo said. “There’s unlimited downside on the currency. You get 20 per cent on the [10-year] bonds but you can lose everything on the FX.”