Turkey central bank persists with interest rate cuts, lira weakens

Turkey’s central bank reduced interest rates to 10.75 percent, pushing on with a series of rate cuts despite increasing pressure on the lira.  

The Monetary Policy Committee lowered the benchmark one-week lending by 50 basis points, or 0.5 percentage points at a meeting in Ankara on Wednesday, the central bank said in a statement. It was the sixth-straight cut.

Turkey has slashed borrowing costs for banks from 24 percent in July, when President Recep Tayyip Erdoğan sacked and replaced the central bank’s governor for failing to listen to government orders. The benchmark rate compares with consumer price inflation of 12.2 percent.

Investors have warned that further rate cuts would pressure the lira despite support for the currency by state-run banks. The banks have sold billions of dollars for liras over the past few weeks.

“The rate-cutting cycle is relentless and the lira is just going to have to get used to that and adjust,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.

The lira fell by 0.3 percent to 6.08 per dollar at 2:24 p.m. in Istanbul, extending the lowest levels in regular trading hours since May. It slumped by 28 percent in 2018, when a currency crisis ravaged financial markets and the economy.

The central bank said its decision to cut rates was backed up by economic indicators.

“Despite signs of recovery, investment and employment remain weak. While favourable effects of improved competitiveness prevail, weakening global economic outlook tempers external demand,” the central bank said in its reasoning for the decision. The outlook for inflation was still broadly in line with year-end expectations, it said.

The central bank forecasts inflation of 8.2 percent by the end of the year.