© Reuters FILE PHOTO: The logo of the Turkish Central Bank (TCB) is seen at the entrance of the bank’s headquarters in Ankara, Turkey. April 19, 2015 REUTERS/Umit Bektas
By Ali Kukukgokmen and Izgi Erkoyun
ISTANBUL (Reuters) – Turkey’s central bank imposed another surprise 100-basis-point cut on Thursday, sending the lira’s decline to an all-time low as inflation soared above 80% and central banks around the world pivoted in opposite directions and tightened policy.
It hit a record high of 18.42 against the dollar, surpassing the level reached last December during the full-blown currency crisis. It was back to 18.37 at 1223 GMT.
Analysts say the easing of the currency is unsustainable and driven by President Tayyip Erdogan’s efforts to reduce borrowing costs to boost exports and investment, and predict further devaluation of the currency in the future. [L8N30T3FS]
Last year’s extraordinary devaluation, coupled with rising commodity prices, pushed inflation to a 24-year high and hit Turks hard.
The central bank continued to act, citing signs of an economic slowdown and assessing whether inflation or inflation could slow.
“Leading indicators for the third quarter point to a slowdown in economic activity,” the policy committee said.
“It is important that financial conditions remain supportive to maintain growth momentum in industrial production and the positive trend in employment,” he said, pointing to growing uncertainty over global growth and worsening geopolitical risk.
Graphic description – wide gap wide gap
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The rate cut runs counter to a global tightening cycle, with the US Federal Reserve raising interest rates by 75 basis points on Wednesday from 3.00%-3.25%. The European Central Bank raised its key rate by 75 basis points this month.
Negative yields, weakening LIRA
Eleven of the 14 economists in a Reuters poll forecast a hold. One predicts a 50 basis-point decrease to 12.50%, while the other two forecasts a 100 basis-point decrease to 12%.
Lim Peach, senior emerging markets economist at Capital Economics, said the “window for easing is open” but further cuts are likely to be gradual.
“The macro background in Turkey is weak. Real interest rates are very negative, the current account deficit is widening and short-term foreign debts are large,” he said.
“It does not want to significantly tighten global financial conditions to weaken investor concerns over Turkey and add further downward pressure on the lira,” Pich added.
Last month, in a shock to market expectations, the bank cut its one-week reserve key to 13 percent at 100 basis points to help it recover from a cooling economy. In the last seven months, it has brought its momentum to a standstill.
At the end of last year, it lowered real rates by 500 basis points with the unconventional policy supported by Erdogan, a red flag for investors.
The Turkish lira has halved in value over the past year due to a policy of devaluation despite rising inflation.
Graphic – Turkish Lira Timeline September 2022
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Each rate cut weighs more on country risk and the lira, said Ipek Ozkardeskaya, senior analyst at Swiss Quotation Bank.
“As an economist, it is difficult to comment on this decision, because normally higher inflation requires higher interest rates.” “Managing Freestyle Monetary Policy Costs, and is Certainly Unsustainable.”
Erdogan has prioritized exports, production and investments in an economic program to reduce inflation by turning chronic current account deficits into surpluses.
Missing that target this year could hurt Turkey’s exports due to rising energy prices and a global economic slowdown.
Since last month’s freeze, the central bank has taken measures aimed at narrowing the gap between the bank’s policy rate and lending rates, creating confusion for both lenders and borrowers.