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Shocked the market again! Turkey’s announcement of a 100bps rate hike amid soaring inflation risks more danger for the lira

Shocked the market again! Turkey’s announcement of a 100bps rate hike amid soaring inflation risks more danger for the lira
Shocked the market again! Turkey’s announcement of a 100bps rate hike amid soaring inflation risks more danger for the lira

Shocked the market again!Turkey raises interest rates by 100bps amid soaring inflation, faces more danger

FX168 Financial News (North America) News Turkey’s central bank on Thursday (September 22) shocked markets again by announcing a sharp interest rate cut despite inflation at a 24-year high and the lira at a record low.

On Thursday, the Monetary Policy Committee, headed by Central Bank Governor Cavicioglu, cut its benchmark interest rate to 12% from 13%, surprising most economists polled by Bloomberg. The lira continued to fall on the news, falling 0.2% against the dollar as of 3:02 p.m. Istanbul time.

(Source: Bloomberg)

Turkey is developing an economic strategy that defies mainstream monetary policy. For most of this year, the country has become an outlier as central bankers around the world unleash the most aggressive tightening measures in decades. The country’s performance was even more pronounced this week as countries such as Indonesia and Brazil raised interest rates.

Similar to August, when Turkey’s central bank unexpectedly cut interest rates by 100 basis points, ending a seven-month pause, and cited “loss of momentum in economic activity” as the reason for Thursday’s decision.

In a statement accompanying its decision, the Monetary Policy Committee signaled its inclination to support the economy and signaled less concern about price stability. “Since the beginning of July, leading indicators have been pointing to slower growth in the domestic economy due to weak foreign demand,” the report said.

Turkish President Recep Tayyip Erdogan and his ally Kavicoglu have insisted on an unorthodox course, refusing to raise interest rates to curb inflation. The practice is designed to encourage economic growth at the expense of price stability, making Turkish assets more vulnerable to sell-offs.

“Inflation is not a serious economic threat,” Erdogan said in an hour-long interview with PBS News this week. Turkey’s annual price growth has exceeded 80 percent, and the lira is one of the worst-performing currencies in emerging markets this year. one.

Bloomberg Economics analyst Selva Bahar Baziki said: “We expect Turkey’s central bank to cut rates further as it looks to boost growth ahead of next year’s elections. The central bank will try to balance easing with other tools – focusing on steering credit growth to curb inflation and support the lira.”

Cavicioglu reiterated in a blog post last week that macroprudential measures and policies aimed at expanding the use of the lira will be used to achieve price stability. Erdogan has fired three central bank governors since 2019, making him the fourth.

Henrik Gullberg, a macro strategist at Coex Partners Limited in London, said the government was “very keen to prop up economic activity” given the ruling party’s approval ratings hovering at record lows and the cost of living soaring.

But he warned that such a policy, combined with fears of a global recession and spiraling inflation, was “a very bad combination” for the lira.

At the end of last year, Turkey’s central bank cut interest rates several times under Kavecoglu’s leadership, when annual price increases were already in the double digits. The central bank said it remained committed to its 5 percent inflation target.

“There will be cuts for the rest of the year,” said Tugberk Citilci, head of research at investment firm InvestAZ Menkul Degerler AS, who had forecast a 100 basis point cut. “The central bank has cut rates in response to the slowdown at home and in the EU.”

Lira faces more danger

Many economists predict the lira will fall further. Capital Economics expects the lira to fall to 24 against the dollar by March 2023.

“There is increasingly limited room for further easing as that puts pressure on the lira and real interest rates,” said Liam Peach, the firm’s senior emerging markets economist. “Turkey’s current account deficit is so large, it has become Depends on the inflow of foreign capital. Turkey’s foreign exchange reserves are so low that the central bank really doesn’t have the ability to step in.”

At some point, confidence will become so low that these vital capital inflows may dry up. “Further rate cuts will make it harder for Turkey to attract these capital inflows,” Peach warned.

Meanwhile, Erdogan remains optimistic, expecting inflation to fall by the end of the year. “Inflation is not an insurmountable economic threat. I’m an economist,” he said in an interview on Tuesday. Erdogan is not a trained economist.

The Turks will likely continue to struggle as their basic cost of living rises, while Russia’s ongoing war in Ukraine has contributed significantly to inflation in global commodity and energy prices.

But at the end of the day, said Erik Meyersson, senior economist at Handelsbanken Capital Markets, “the most pressing issue is the regime’s mismanagement of the domestic economy.”

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Tags: Shocked market Turkeys announcement #100bps rate hike soaring inflation risks danger lira

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