As was expected, moments ago the Turkish central bank cut its key interest rate for a third month but said it would consider ending the easing cycle from December amid a weakening currency and worsening inflation outlook. The lira crashed to a fresh all time low after staging a feeble rally overnight ahead of the rate cut.
Terrified of being fired by Erdogan, the Monetary Policy Committee heeded the president's renewed push for lower borrowing costs, and cut its one-week repo rate by 100 basis points to 15%, in line with the median estimate in a Bloomberg poll of 24 economists and the central bank’s own monthly survey.
The cut pushed real yields further below zero as consumer inflation climbed to an annual 19.9% in October. And with inflation set to top 20%, even the lunatic that run the Turkish monetary asylum have to realize that -5% real rate will be devastating and as such, the bank hinted at an end to the rate cuts: “The Committee expects that the transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases will persist through the first half of 2022,” it said in a statement. The central bank would therefore consider ending the cuts next month, it said.
That vague promise was not nearly enough to worst-performing major currency of the year, and the lira slumped to a new record low against the dollar after the decision, reversing earlier gains. It was trading 1.4% lower at 10.86 as of 3 pm local time. The lira has weakened more than 30% against the dollar this year, and over 15% this quarter alone, the worst performer among all major currencies tracked by Bloomberg.
Echoing what we have said all along, Piotr Matys, a senior currency analyst at InTouch Capital in London said that “today’s decision provides more evidence that the central bank simply doesn’t care about the value of the lira and rejects the notion that substantial depreciation will have serious negative consequences.” He added that “the market is unlikely to buy into the forward guidance that the easing cycle may end in December. It shouldn’t be called an easing cycle but a dangerous experiment in monetary policy that will have serious negative consequences.”
Yes, like hyperinflation but that's good for stocks, and as a reminder, it was none other than Erdogan who yesterday was confused why people are complaining about the crashing lira when they can just invest in stonks.
At least today's rate cut did not take traders by surprise unlike some of the central bank's recent moves. Investors were bracing for another cut after Erdogan vowed yesterday to keep fighting for lower rates "to the end". Evoking Islamic teachings that prohibit usury, the comments were the latest iteration of his unorthodox mantra that high borrowing costs cause inflation rather than curbing it.
And, as Bloomberg reminds us, facing imminent termination by the president should the central bank disappoint, the monetary authority had already slashed its policy rate by a total 300 basis points in two consecutive, and unexpected, moves before Thursday’s meeting.
Continuing his campaign to make a mockery of monetary policy, the president told reporters that the central bank would decide its policy independently, amid accusations of intense political pressure on policy makers. However, not heeding his calls has cost central bankers their jobs in the past. Sahap Kavcioglu is the fourth governor since 2019, with the president firing his three immediate predecessors and removing committee members who opposed cuts.
Erdogan’s ruling AK Party has for decades based its electoral success on rapid levels of economic growth, often driven by reducing borrowing costs to encourage credit expansion. When the economy sank during the pandemic, support for Erdogan and his party also fell to all-time lows, prompting him to redouble efforts to propel growth though rising prices are hurting his traditional working class base the most.
As Bloomberg notes, the statistics agency will publish third-quarter gross domestic product growth data on Nov. 30 and October inflation data on Dec. 3. The central bank raised its inflation projections for the end of this year to 18.4%.