The Turkish lira dips to its lowest level in its history after a sudden interest rate cut

The Turkish lira fell to an all-time low after the central bank cut its key interest rate on Thursday, sparking a new wave of market turmoil and undoing President Recep Tayyip Erdogan’s intervention on monetary policy.

The MPC lowered its key one-week repo rate by 100 basis points to 18%. While all but one of 23 economists surveyed by Bloomberg expected the central bank to keep interest rates unchanged at 19%, according to what Al Arabiya saw.net.

Turkish inflation unexpectedly rose to 19.25% last month, pushing the country’s real interest rate below zero for the first time since October. But Turkish central bank governor Kavcioglu earlier this month shifted the bank’s policy focus to underlying inflation, which excludes volatile elements such as food and energy and is about 250 basis points below the title figure, giving him space to hear Erdogan’s demands for lower interest rates.

Erdogan promised lower borrowing costs and slower inflation starting this month, and failing to do so could have cost the central bank governor his job.

Kavcioglu, who kept the benchmark unchanged for the fifth meeting last month, is the fourth central bank governor since 2019, when the president sacked his three immediate predecessors.

The central bank said the recent rise in inflation was due to transitional factors and canceled its commitment to keep the key rate above inflation and to maintain tight monetary policy.

The bank also stressed the importance of removing the impact of supply shocks on price increases and focusing on “core inflation developments” in a statement accompanying the interest rate decision.

Piotr Matys, chief currency strategist at Intouch Capital Markets, said: “This move remains shocking as the initial negative market reaction clearly indicates the start of the easing cycle as underlying inflation is about to end. quest’year well above official expectations “. he added, justifying it with a slowdown in core shares is a very risky move that could be counterproductive. in how much a weaker lira would have inflationary consequences.

The only analyst to predict a rate cut was Ibrahim Aksoy, Istanbul-based chief economist at HSBC Asset Management in Turkey.

Aksoy ranks among the best forecasters of Turkish interest rate decisions in two years of Bloomberg investigations and stated before the decision: “In the event of a sudden rate cut, the dollar / lira pair could test the record of 8.80 lire per dollar. “

The cut now risks further turmoil for the lira, which has already weakened by more than 16% against the dollar since the governor took office on March 20. Investors have repeatedly criticized the central bank for being too quick to reverse the tightening and too slow to respond to risks.

The currency fell to a new low record against the dollar and was traded in decrease of 1.1% to 8.7537 lire per dollar at 2:25 pm local time in Turkey.

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