Turkey’s surprise rate cut drags currency down
- The US dollar rose against the Turkish lira on Thursday after Turkey cut its key rate.
- The rate cut surprised markets, with Turkish inflation hitting 79.6% in July.
- Turkey’s central bank said it expects a “disinflation process” to begin.
Turkey’s central bank cut its benchmark interest rate by 1 percentage point on Thursday, an unexpected move that sent the pound lower against the US dollar as the country’s inflation rate hovered around 80%.
There has been “a certain loss of dynamism in economic activity” and a process of disinflation should soon set in, the Central Bank of the Republic of Turkey said. said in a press release on its decision to cut rates. The benchmark rate was cut from 14% to 13%, beating the expectations of 21 economists in a Bloomberg survey who expected no rate change.
The dollar gained ground against the Turkish currency, rising 0.9% to 18.1185 and leaving the lira near a record low against the greenback.
“You want to know who is pumping a lot of money into the market today? The Turkish central bank,” said John Kicklighter, chief strategist at DailyFX.com, said in a Twitter post. “The surprise 100 basis point drop to 13% earlier in the day (despite inflation of around 80%) *only* pushed $USDTRY up 0.8%.”
The decision of the Monetary Policy Committee, headed by Governor Sahap Kavcioglu, has been taken inflation stood at 79.6% in the 12 months to July, partly due to rising energy costs. Global energy prices have surged this year following the invasion of Ukraine by major oil producer Russia.
“The Committee expects the process of disinflation to start with the measures taken and decisively implemented to strengthen sustainable price stability and financial stability as well as the resolution of the ongoing regional conflict,” the Commission said. central bank.
Turkish President Recep Tayyip Erdogan has strongly opposed rate hikes and pressured the central bank to keep rates low. But a depreciating lira could exacerbate Turkey’s inflation by making imports more expensive, especially as the country remains dependent on foreign energy products.
Meanwhile, there has been an uptick in imports of Russian crude into ports in Turkey and other countries in the Mediterranean region, reaching multi-week highs in early August.
“It is important that financial conditions remain supportive to preserve the momentum of industrial production growth and the positive employment trend in a period of growing uncertainties regarding global growth as well as escalating geopolitical risk,” he said. said the central bank.