UPDATE 1-Turkey forges on with 100-point rate cut despite lira meltdown
(Adds statement from MPC, updates market reaction, adds graphic)
ISTANBUL, Nov 18 (Reuters) – Turkey’s central bank slashed its policy rate by 100 basis points to 15% on Thursday and hinted at more easing despite inflation running near 20%, accelerating a spiral to all-time lows in the lira currency.
The bank, seen as bowing to President Tayyip Erdogan’s calls for stimulus despite the risks, extended as expected an easing cycle that began in September when the one-week repo interest rate was lowered from 19%.
The lira tumbled versus the dollar after the rate decision to 10.98, down 3% and matching a record low hit earlier in the day. It was worth 10.85 at 1129 GMT.
“Literally insane move which puts the lira in real jeopardy,” Tim Ash of BlueBay Asset Management said of the rate cut on Twitter.
The central bank was expected to cut by 100 basis points according to a Reuters poll last week, though some analysts thought the 9% lira selloff this week would stay its hand. The size of last month’s 200-point cut surprised markets.
Analysts have called the monetary easing premature and reckless given it leaves Turkey’s real yields sharply negative, and runs against the grain of a world in which central banks are raising rates to head off global price rises.
The central bank’s policy committee said temporary factors driving up inflation, including supply, would remain through the first half of next year.
“The Committee will consider to complete the use of the limited room implied by these factors in December,” when it holds its last policy meeting of the year, it added.
The central bank’s credibility has been battered in recent years given Erdogan’s frequent criticism of interest rates and his rapid overhaul of the bank’s leadership over policy differences.
Erdogan pledged on Wednesday to continue battling interest rates “to the end,” accelerating the currency selloff that has had echoes of a full-blown crisis in 2018.
The 32% lira depreciation so far this year raises prices via imports, further stoking inflation that has steadily climbed to 19.89% last month, the highest in nearly three years.
Inflation is four times the central bank’s official 5% target, sharply raising living costs for Turks along with the currency depreciation.
Last month the central bank began emphasising the need to address current account deficits. It has recently focused more on the core “C” inflation measure, which strips out energy, food and some other goods, and which eased to 16.82% in October.
Most of the lira drop this year has come since September when a more dovish policy stance was adopted. It is by far the worst performer in emerging markets this year.
Source: Read Full Article