ISTANBUL: Turkey’s central bank delivered another surprise 100-basis-point rate cut on Thursday, sending the lira to an all-time low, even as inflation rose above 80% as central banks worldwide ran in the opposite direction to tighten policy.
Turkey’s lira hit a record high of 18.42 against the dollar, surpassing levels reached during a full-blown currency crisis last December. It returned at 18.37 at 1223 GMT.
Analysts said the devaluation was unsustainable and that further currency depreciation could follow, driven by President Tayyip Erdogan’s efforts to lower borrowing costs to stimulate exports and investment.
Last year’s unusual rate cuts pushed up commodity prices, pushed inflation to a 24-year low and triggered a cost-of-living crisis for Turks.
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The central bank justified the move by citing persistent signs of economic slowdown and reiterated that it expects inflation or a decline in the inflation rate.
“Leading indicators for the third quarter continue to point to a loss of momentum in economic activity due to declining external demand,” its policy committee said.
“It is important that fiscal conditions remain supportive to preserve the growth momentum of industrial production and the positive trend in employment,” it said, citing rising uncertainties in global growth and increasing geopolitical risk.
The rate cuts come against a global tightening cycle that saw the US Federal Reserve raise its benchmark overnight interest rate by 75 basis points to 3.00%-3.25% on Wednesday. The European Central Bank also raised its key rates by 75 basis points this month.
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11 out of 14 economists Reuters Election forecasting rates will be suspended. One predicted a 50 basis point cut to 12.50% and two predicted a 100 basis point cut to 12%.
Liam Peach, senior emerging markets economist at Capital Economics, said the “window for easing remains open” but that further cuts would be gradual.
“The macro backdrop in Turkey remains grim. Real interest rates are deeply negative, the current account deficit is widening and short-term external debt is large,” he said.
“Investors’ risk sentiments on Turkey have soured and it may not take a significant tightening of global financial conditions to add further downward pressure on the lira,” Beach added.
Last month, in an earlier shock to market expectations, the bank cut its key one-week repo rate by 100 basis points to 13% to stem a cooling economy. It kept the rate steady over the previous seven months.
Late last year, it cut rates by 500 basis points in line with an unconventional policy advocated by Erdogan, turning real rates deeply negative, a red flag for investors.
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Turkey’s lira has halved in value over the past year, largely due to a policy of cutting rates despite rising prices.
Each rate cut weighs heavily on country risks and the lira, said Ibek Oskardeskaya, senior analyst at Swisscote Bank.
“As an economist, it is difficult to comment on this decision because generally, higher inflation requires higher interest rates,” he said. “Freestyle monetary policy management costs and is certainly not sustainable.”
Erdogan has prioritized exports, manufacturing and investment under an economic plan aimed at reducing inflation by turning a chronic current account deficit into a surplus.
That target may not be met this year due to rising energy prices and a global economic slowdown affecting Turkey’s exports.
After last month’s cut, the central bank has taken steps to address the widening gap between the bank’s policy rate and lending rates, which has caused confusion for lenders and borrowers.