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Turkey shocks markets with rate cut despite near 80% inflation

Turkish President Tayyip Erdogan arrives at a NATO summit in Madrid, Spain on June 29, 2022.

Sweet Nacho | Reuters

Turkey’s central bank shocked markets on Thursday with a cut in its benchmark interest rate, despite inflation in the country nearing 80%.

The country’s currency, the lira, fell 0.9% against the dollar, trading at more than 1[ads1]8.1 to the dollar after the news – near a record low.

The country’s key policy rate, which had been at 14% for the past seven months, was cut to 13% in a complete mismatch with what other central banks are doing around the world.

“Another idiotic move,” commented Timothy Ash, a senior emerging market strategist at BlueBay Asset Management.

“True with inflation at 80% and still rising CBRT cuts rates, against expectations by 100bps to just 13%,” he wrote on Twitter, referring to Turkey’s central bank by its acronym.

“Ridiculous move. Obviously they have cash in their pockets from Russia and the Gulf and think they can cut interest rates + keep the lira.”

Analysts expected no rate change; The central bank’s decline has surprised the markets. The main BIST index snapped session gains to trade lower by 0.8% after the decision, according to Reuters data.

Turkey’s inflation for the month of July rose an eye-popping 79.6% year-on-year, the highest in 24 years, as the country grapples with high food and energy costs and President Recep Tayyip Erdogan’s long-running unorthodox monetary policy strategy.

Rising consumer prices have hit the population of 84 million hard, and few have hope of recovery anytime soon thanks to the war between Russia and Ukraine, high energy and food prices and a severely weakened lira.

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