Thursday October 21, 2021
Surprise for the monetary authorities
Turkish central bank cuts key interest rate sharply
The Turkish head of state Erdogan is seen as an opponent of high interest rates. Is that why the central bank is lowering the key interest rate more than economists expected? They fear that current monetary policy is driving the lira’s depreciation further.
The Turkish central bank has lowered its key interest rate surprisingly significantly. The monetary authorities cut the key monetary policy rate to 16 from 18 percent. Economists polled by Reuters had only expected a value of 17.5 percent. The central bank stated that the scope for a further reduction by the end of the year was limited. Inflation effects are more temporary.
Inflation rose to 19.6 percent in September, its highest level in two and a half years. “The central bank’s policy of lowering interest rates with rising inflation and a weakening currency is likely to exacerbate both problems by further fueling capital flight and discouraging investment,” wrote the analysts at Stratfor.
The independence of the central bank has recently been one of the main concerns of investors. Head of state Recep Tayyip Erdogan is an avowed opponent of interest rates and has already kicked the last three central bank governors out of the door due to differences in monetary policy. In mid-March he surprisingly fired central bank chief Naci Agbal and replaced him with Sahap Kavcioglu – a declared opponent of a tight monetary policy. Last week he dismissed three members of the Monetary Policy Committee and appointed two new ones in their place.
The Turkish lira has lost more than half of its value in the past three years. According to observers, this is also due to Erdogan’s constant interference in central bank matters, which undermine confidence in the monetary authorities and in the lira.