Turkey Central Bank Shocks with Another 100bp Cut Accelerating Turkish Lira Free Fall

The Central Bank of Turkey unexpectedly cut its interest rate by 100bps to 12% at its September 2022 meeting on Thursday bank cut key interest rates for the second consecutive month. There is concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy. The move surprised markets that expected rates to remain steady at 13%. Turkey gave another great lesson on why Central Banks and Governments should be independent. Turkey’s currency, the lira collapse accelerated further by 0.4% after the decision, with one U.S. dollar buying a record 18.4008 lira.


Meanwhile Turks can’t afford bare necessities as inflation runs rampant from the collapsed currency. Inflation in Turkey has climbed to 80% over the year, a 24-year high. The central bank now predicts inflation will reach a high of around 85% this fall, before ending the year near 60%, or 12 times its target.

Recent opinion polls show Mr. Erdogan losing or in a dead heat with potential challengers in an election scheduled for next year.

Turkey Collapsing currency

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 half 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.

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.

The theory is an increase of more than $15 billion in Turkey’s gross foreign reserves last month, following money transfers from Russia for the construction of a nuclear power plant may have given the central bank the confidence that it can wait out the pressures, especially as policy makers expect inflation to peak soon.

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

From The TradersCommunity News Desk