Sep 12 2019

Turkey central bank cuts rates by 325 basis points after Erdoğan call

Turkey’s central bank cut its benchmark interest rate by more than economists expected, appearing to at least partially respond to a call by President Recep Tayyip Erdoğan to sharply reduce borrowing costs.

The central bank lowered its one-week lending rate by 325 basis points to 16.5 percent, it said on its website on Thursday. The bank also decreased borrowing costs by 425 basis points at its last Monetary Policy Committee meeting in July

Erdoğan is requesting big reductions in interest rates for consumers and businesses to kick-start economic growth following a currency crisis last year. He replaced the central bank’s governor in July after he failed to follow the government’s instructions.

"The current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path," the central bank said. The battle with inflation will require a cautionary stance, it said.

At the weekend, Erdoğan said that Turkey would cut rates and slow inflation to single digits in a short time. He promotes an unconventional theory that lower interest rates lead to slower inflation.

Polls of economists had predicted a rate reduction of between 250 and 275 basis points. Reuters reported on Wednesday that traders were pricing in a cut of between 300 and 400 basis points.

“A bit more than the consensus, but with base period effects (for inflation) coming through now to October, the market will probably give them the benefit of the doubt,” Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London, said in emailed comments to clients.

The lira climbed 1 percent to 5.68 per dollar at 2:25 p.m. local time in Istanbul, paring losses for the year to about 7 percent. The currency lost 28 percent of its value in 2018.

The central bank was expected to reduce rates by 500 basis points, the pro-government Yeni Şafak newspaper said earlier this week, without citing anyone.

The reports of such a large rate cut had “set it up for this still lofty 325bps rate cut to be taken in its stride”, Ash said.  

Inflation may slow to single figures in October before accelerating again, economists predict. Annual inflation slowed to 15 percent in August from 16.7 percent in July, according to official data. Meanwhile, global central banks have announced easing cycles that help emerging markets reduce their own lending costs.