Turkey Central Bank Shocks with 150bp Cut Accelerating Turkish Lira Free Fall

The Central Bank of Turkey unexpectedly cut its interest rate by 150bps to 10.50% at its October 2022 meeting on Thursday. The bank cut key interest rates for the third consecutive month. There is concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy. The move surprised markets that expected a 100bps cut. The TCMB signaled it will take the same step in the next meeting to end the rate-cutting cycle. Turkey’s currency, the lira collapse accelerated further after the decision, with one U.S. dollar buying a record 18.60 lira.


Turkey gave another great lesson on why Central Banks and Governments should be independent. Recent opinion polls show Mr. Erdogan losing or in a dead heat with potential challengers in an election scheduled for next year.

Meanwhile Turks can’t afford bare necessities as inflation runs rampant from the collapsed currency. Inflation in Turkey went over 83% in September, the highest since 1998, largely due to surging costs of importing energy with an increasingly weak currency.  The central bank had predicted inflation will reach a high of around 85% this fall, before ending the year near 60%, or 12 times its target.

 The decision added to the 850bps in unorthodox rate cuts since September of 2021 

Turkey Interest rates

Lira Trampled Underfoot

The TCMB’s board signaled that it would continue to mandate measures to stimulate lira usage in Turkey until inflation falls to the 5% level

The Turkish central bank has also spent tens of billions of dollars in foreign currency in interventions to prevent a more severe slide in the lira, economists say.

The currency is now worth about 45% of its value at the beginning of the year making imports at least doubly expensive. Turkey’s economy is heavily dependent upon imports for producing goods from basic foods to textiles, so the rise of the dollar against the lira has a direct impact on the price of consumer products.

Turkish Lira Collapse

Risk is alleviated with the yield on a Turkish dollar bond maturing in March 2027 has risen to 10.407% from 7.402% at the end of last year. Investors also sold Turkish bonds after the decision, sending the yield on a government dollar bond maturing in March 2027 up to 10.407%, from 10.218% on Wednesday, according to Tradeweb.

Business conditions among Turkish manufacturers continue to deteriorate the most since May 2020 after output and new orders suffered their worst performance since the first wave of the coronavirus pandemic. The threat of a recession in Europe, the main destination for Turkish shipments abroad, is a huge concern for an industry that now accounts for 95% of Turkey’s total exports.

The latest current account deficit widened to over 13 fold and the trade deficit tripled from the corresponding period of the previous year, contradicting Erdogan’s pledge that Turkey would consolidate a strong surplus position.

Erdogan has dug his heals in from the widespread criticism and pleas to reverse course on rates. In the past two years he has sacked three central bank presidents and only this week replaced his finance minister. And so, the lira continues to collapse.

Şahap Kavcioğlu, the Turkish central bank governor, supports president Recep Tayyip Erdoğan’s theory that high interest rates cause inflation, while mainstream economists subscribe to the opposite view.

Mr. Erdogan has turned to Russia to bolster the Turkish economy, accelerating trade between the two countries and welcoming inflows of Russian money that have helped Turkey shore up the foreign assets needed to stabilize the lira.

Turkey’s deepening economic ties with Russia have led to Western pressure over concerns that Mr. Erdogan is helping the Russian government and oligarchs evade sanctions imposed in response to the invasion of Ukraine. Two major Turkish banks this week said they dropped the use of Russia’s Mir card after the U.S. sanctioned the head of the payment system, which is an alternative to Visa and Mastercard.


Source: TCMB WSJ

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