Turkey central bank cuts main interest rate after Erdogan pleas

Turkey central bank cuts main interest rate after Erdogan pleas
Turkey's central bank cut its main interest rate on Thursday after months of pressure from President Recep Tayyip Erdogan for it to do so, causing the lira to sink.
2 min read
23 September, 2021
The central bank's move to cut the main interest rate surprised analysts [Getty-file photo]

Turkey's central bank cut its main interest rate on Thursday after months of pressure from President Recep Tayyip Erdogan for it to do so, causing the lira to sink.

The Turkish currency was down around 1.1 percent against the US dollar by 1:30pm GMT, after the bank announced it was cutting the one-week repo rate to 18 percent from 19 percent in a decision that surprised analysts.

The move comes despite high inflation, which reached 19.25 percent in August, and appears to show just how much pressure the bank is suffering under Erdogan's rule.

The Bloomberg consensus had been for the rate to be kept stable although one economist predicted a cut of 0.5 percent.

Erdogan has previously described interest rates as the "mother and father of all evil" and last month said they needed to fall for lower inflation to follow, going against economic orthodoxy.

The lira has lost around 15 percent of its value against the greenback since the start of 2021.

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Earlier this month, central bank governor Sahap Kavcioglu told investors that consumer prices were expected to drop in the months ahead.

He added that the bank would now look at "core" inflation - which is below 17 percent after excluding volatile items such as food and fuel - for future decisions.

"Mr Kavcioglu had built up some credibility, albeit from a low base, over the past six months," commented Jason Tuvey of Capital Economics.

"But today's move has now destroyed that and any remaining notion that policymakers in Turkey will try to tackle the country's inflation problem."

Weighing more on the Turkish central bank chief's mind may be "what happened to previous CBRT governors that defied President Erdogan," Tuvey added.

Kavcioglu is the fourth governor since 2019 after Erdogan sacked three central bankers because they were either raising borrowing costs or not lowering them rapidly enough.

His first rate cut follows wild but unconfirmed speculation in Ankara this month that he faced a similar fate if he did not reduce the rate.

Now, "as the lira falls to fresh lows, inflation remains higher, and given the increased risks to the economic outlook, the CBRT's hands remain tied" into trying to slow price growth, ThinkMarkets analyst Fawad Razaqzada said.

"I would be surprised if we see further rate cuts until domestic and global inflationary pressures actually start to fall back".