Turkish Central Bank Slashes Rate Despite Weak Lira

Turkey’s central bank slashed its key interest rates sharply for the third straight month despite stubbornly high inflation and send the currency Lira to a fresh record low.

The Monetary Policy Committee of the Central Bank of the Republic of Turkey, governed by Sahap Kavcioglu, decided to cut the one-week repo rate by 100 basis points to 15.00 percent from 16.00 percent.

Under pressure from President Tayyip Erdogan, the bank had lowered the rate by 400 basis points since September.

The bank had last lifted the interest rates by 200 basis points at the March meeting under the leadership of former governor Naci Agbal.

“The Committee evaluated the analyzes on the decomposition of demand factors that can be affected by monetary policy, core inflation developments and the effects of supply shocks, and decided to reduce the policy rate by 100 basis points to 15 percent,” the bank said in the statement.

The committee expects the temporary effects of supply-side factors outside the influence of monetary policy on price increases to continue throughout the first half of 2022.

The Board will consider completing the use of the limited space implied by these impacts in December.

While the CBRT did signal that the easing cycle would probably end in December, there is still a large risk that a self-fulling cycle takes hold, pushing the lira to even greater depths, Jason Tuvey, an economist at Capital Economics, said.

The decision is a reminder that monetary policy in Turkey is being dictated at the presidential palace and also that the CBRT is now more tolerant of a weaker lira than it has been in the past, the economist added.

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