Turkey’s central bank cuts rate again despite nosediving lira
Erdogan’s push for lower interest rates despite Turkey’s tumbling currency and soaring inflation is an economic gamble that he is unlikely to win.
Turkey’s central bank cut its policy rate by 100 basis points to 15% Thursday, ignoring alarm over the country’s nosediving currency and soaring inflation.
The third rate cut in as many months followed President Recep Tayyip Erdogan’s fresh outburst against high interest rates the day before. The reductions, totaling 400 basis points, have brought the bank’s benchmark rate five percentage points below the nearly 20 percent consumer inflation rate, pushing real yields into negative territory.
The decision of the bank’s monetary policy committee was hardly a surprise. The central bank had signaled further, even if smaller, rate cuts in October, when it slashed its policy rate by 200 basis points. And on the eve of Thursday’s meeting, Erdogan vowed to continue fighting for lower interest rates, insisting on his unconventional view that high borrowing costs are the cause of high inflation.
Like the previous rate cuts, the anticipation of a third one had already plunged the Turkish lira into a new tailspin. The rush for hard currency, coupled with a shrinking supply, caused the lira to fall below the psychological threshold of 10 against the dollar earlier this month. Not even the expected inflow of at least $2 billion in fresh foreign investment curbed the slump of the lira after Spanish lender BBVA announced a bid to acquire full ownership of Turkey’s Garanti Bank, in which it is currently a partner.
