NEW YORK (CNBC) - Turkey’s
central bank shocked markets Thursday with a cut to its benchmark policy rate, despite inflation in the country sitting near 80%.
The lira, Turkey’s currency, slid 0.9% against the dollar, trading at more than 18.1 to the greenback after the news — near a record low.
The country’s main policy rate, which had been at 14% for the last seven months, was cut to 13% in a complete mismatch to what other central banks are doing around the world.
“Another idiotic move,” commented Timothy Ash, a senior emerging markets strategist at BlueBay Asset Management.
“Insane with inflation at 80% and still rising the 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 got cash in their pockets from Russia and the Gulf and think they can cut rates + hold the Lira.”
Turkey’s government has made a show of diplomatic overtures to several oil-rich Persian Gulf states, mending formerly strained ties to attract much-needed investment, and has remained enthusiastically open to Russian business and trade despite Western sanctions on Russia.
Analysts expected no rate change, so the move lower by the Turkish central bank has taken markets by surprise. The main BIST index snapped session gains to trade lower by 0.8% after the decision, though later turned positive, up 0.2% within the following hour, according to Reuters data.
The Turkish central bank’s statement Thursday said that the committee expects the “disinflation process to start” and that there are signals of a “loss of momentum in economic activity.”
Turkey’s inflation for the month of July rose by an eye-watering 79.6% year over year, its highest in 24 years, as the country grapples with soaring food and energy costs and President Recep Tayyip Erdogan’s long-running unorthodox strategy on monetary policy. This time five years ago the lira traded at 3.5 to the dollar; now it’s more than 18 to 1.
Surging consumer prices have hit the population of 84 million hard, and few have hopes for improvement anytime soon thanks to the Russia-Ukraine war, high energy and food prices, and a sharply weakened lira.
Turkey has enjoyed rapid growth in previous years, but Erdogan for the last few years refused to meaningfully tighten policy to cool the resulting inflation, describing interest rates as the “mother of all evil.”