In a move that has taken the world by surprise, Turkey has responded to rising inflation by announcing a shocking 100-basis point cut, bringing its main benchmark policy rate from 14 percent to 13.
The move by the central bank shocked markets as it comes at a time when inflation in the country is almost 80 percent, and it led to an already free-falling lira, the Turkish currency, slide another 0.9 percent against the dollar.
Five years ago, one dollar would fetch nearly 3.5 liras. Yesterday, one dollar was selling for 18.1 liras.
The bank had held its rate at 14 percent for the past seven months after cutting it by 500 basis points towards the end of last year.
In a statement, the bank’s monetary policy committee said: “It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk.
“Accordingly, the Committee has decided to reduce the policy rate by 100 basis points, and has assessed that the updated level of policy rate is adequate under the current outlook.”
The country is grappling with soaring food and energy costs. With inflation at 24-year highs, the rate cut was completely unexpected. None of the analysts saw it coming, although the consensus was that the central bank will hold it for now.
Turkish President Tayyip Erdogan, in a speech in May 2018, had described interest rates as the “mother and father of all evil”.
“If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates,” Erdogan had said. “Because my belief is that interest rates are the mother and father of all evil.”
Jason Tuvey, senior emerging markets economist at the London-based Capital Economics, wrote in a note to Reuters: “This latest move could be the trigger for yet another currency crisis.”
“It is clear that the CBRT is taking its instructions from President Erdogan, whose unorthodox views form the basis of the government’s ‘new economic model’ of low real interest rates. Turkey’s external position remains extremely poor.”
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