Ankara: Turkey’s new central banker delivered the biggest interest-rate cut in at least 17 years, putting President Recep Tayyip Erdogan’s unconventional policy goals into practice less than three weeks after getting the job.
The monetary policymakers led by Murat Uysal slashed the benchmark borrowing rate by 425 basis points to 19.75 per cent on Thursday, exceeding all but one of the 34 analyst forecasts. It was the first cut since 2016 and the biggest since a shift to inflation targeting in 2002.
The central bank cited “weaker global economic activity and heightened downside risks to inflation” and pledged to use all instruments to safeguard price stability. The lira plunged just over 1 per cent against the dollar after the decision before erasing losses. It traded 0.3 per cent stronger as of 2.36pm in Istanbul.
“The extent of monetary tightness will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process,” the central bank said in a statement.
The sharp pivot toward monetary easing runs the risk of spooking inflation-wary investors in pursuit of Erdogan’s unorthodox theory that high interest rates cause rather than curb price growth. He fired Murat Cetinkaya as governor for failing to act, leaving Uysal with the challenge of how to navigate the conflicting demands of the presidency and markets.
“The much bigger than anticipated cut marks the new era for a central bank whose independence has been severely undermined,” said Piotr Matys, a London-based strategist at Rabobank.
“While the lira has quickly recovered from the initial knee-jerk reaction, today’s decision is a very clear signal that the interest-rate differentials will narrow markedly in the coming months, leaving the currency far more exposed when the external backdrop deteriorates,” he said.
Uysal had plenty of reasons to start an easing cycle this month. The economy continues a slow slog after recession and lending is on the decline again. A dovish turn in monetary policy globally and a downswing in price growth have left Turkey with the world’s highest real rate before the decision.
Powerful base effects will likely continue to choke off inflation, which is already down almost 5 percentage points so far this year. The central bank on Thursday said recent forecast revisions indicate that inflation will probably end the year below the 14.6 per cent projected in its April report.
‘Room for manoeuvre’
In an interview last week, Uysal saw “room for manoeuvre in monetary policy” but vowed to preserve “a reasonable rate of real return” for investors.
The lira’s fortunes have also reversed, especially after President Donald Trump indicated the US may reassess a threat to sanction Turkey over its purchase of a Russian defence system. The currency is the world’s best performer since the start of May.
As a drumbeat of political pressure grows on central banks from the US to India, Erdogan one-upped his counterparts thanks to the powers granted to his office after last year’s general election, which transformed the political system into an executive presidency.
Still, a wallop of monetary easing could easily unsettle the calm.
Erdogan promised to take more direct control over rate decisions in an interview last year and warned following a massive rate increase in September that “there is a limit” to his patience. The tipping point came when Cetinkaya extended a policy pause to nine months in June, prompting Erdogan to call the 24 per cent benchmark “unacceptable.”
Erdogan’s power grab was years in the making. In his view, producers have to pass on their higher borrowing costs to customers, so they raise prices.
“The game plan is to cut rates as much as they can, or rather as much as the market will let them get away with,” Timothy Ash, a strategist at BlueBay Asset Management in London, said by email before the decision. “Uysal was hired as the assumption is or was he will follow the presidential script, which is cutting rates.”