Turkey’s Central Bank Cuts Rates in Surprise Decision

Turkeys Central Bank Reduces Interest Rates in a Surprising Move  — On Thursday, Turkey’s central bank dropped key interest rates for the first time in eight months, continuing an unusual strategy desired by President Recep Tayyip Erdogan. President of Turkey Recep Tayyip Erdogan had resulted in a currency crisis the previous year. The bank lowered its benchmark interest rate from 14% to 13%, causing the Turkish lira to fall and yields to rise.

The Turkish currency lost more than fifty percent of its value after Mr. Erdogan forced the central bank into enacting a series of four interest-rate cuts to encourage economic development amid growing inflation last year. The action destabilized the Turkish economy and eroded Mr. Erdogan’s public support, jeopardizing his almost two decades in office.

“It is essential that financial circumstances remain favorable in order to sustain the growing momentum in industrial output,” the bank said in a statement announcing the decision on Thursday.

Contrary to the actions of other central banks around the world, which are raising interest rates to contain rampant inflation caused by high energy prices, the Russian invasion of Ukraine, supply-chain issues, and economic growth in the wake of the pandemic, the central bank in question decided to lower rates.

While some investors and experts are concerned about the slowdown of global economy, central bankers in key nations have said that containing inflation is of essential importance, even if it means sacrificing growth.

According to official statistics, Turkey now has one of the highest inflation rates in the world, at over 80%. According to independent experts, the rate might be far higher.

Mr. Erdogan supports for lower interest rates to spur economic expansion. He has also referenced the religious concerns of Muslims to interest rates.

Sahap Kavcioglu, seated, was appointed governor of Turkey’s central bank in 2016 after President Tayyip Erdogan ousted a series of his predecessors.

After Thursday’s ruling, the lira lost 0.8% of its value versus the dollar, with one dollar purchasing more than 18 lira, bringing the Turkish currency close to all-time lows. This year, the lira has lost more than a quarter of its value versus the dollar.

I’d say I’m surprised, but I’m not. It is stunning but not surprising. According to Timothy Ash, senior sovereign strategist covering developing countries at BlueBay Asset Management, this is what they do.

In pursuit of his agenda, Mr. Erdogan has sacked a number of central bank governors, and last year the Turkish president fired a number of other bank executives in order to pave the way for interest-rate reduction. Since January of this year, the Turkish central bank has maintained interest rates each month, a strategy that has done nothing to halt the lira’s decline as inflation continues to grow.

On Twitter, former central bank governor Durmus Yilmaz remarked, “Today, the central bank made a purposeful action to exacerbate the already extreme poverty that exists.”

In recent years, Turkish policymakers have employed a variety of tactics to slow the lira’s slide versus the dollar, consuming billions of dollars’ worth of foreign currency. Historically, these monies have originated from the country’s internal banks as well as several Persian Gulf nations. According to financial professionals, Turkey’s foreign reserves have rebounded in recent weeks due to the summer tourist season and an expected infusion of cash from Russia.

 

Turkey's Central Bank Reduces Interest Rates in a Surprising Move

 

Additionally, investors sold Turkish dollar bonds and sought protection against their default. According to statistics from Bloomberg, the yield on a Turkish dollar bond expiring in March 2027 increased to 10.027% from 9.72% on Wednesday. Prices and rates fluctuate in the other direction, with yields increasing when investors sell bonds.

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The cost of insuring against failure on $10,000 of five-year Turkish bonds denominated in U.S. dollars using instruments known as credit-default swaps increased by $50 after the reduction in interest rates, experts said, bringing the cost close to $780. Last month, the price approached $900 as investors became concerned that strong inflation and unorthodox economic policies may raise the likelihood of a default.

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