- Central bank is forecast to cut rates by full percentage point
- Erdogan called for benchmark to fall below 10% before election
According to Bloomberg’s article published on October 20, 2022, Turkey’s central bank is poised to take another step toward cutting interest rates into single digits this year, a gamble masterminded by President Recep Tayyip Erdogan to power economic growth ahead of elections next June.
Governor Sahap Kavcioglu is pushing monetary policy to new extremes at a time when inflation has rocketed past 100% in parts of Turkey. On Thursday, most economists surveyed by Bloomberg predict the central bank will deliver its third consecutive cut of a full percentage point to 11%.
Following Erdogan’s recent call for rates to come down, HSBC Asset Management Turkey’s chief economist Ibrahim Aksoy expects moves of the same magnitude at each of the two remaining policy meetings after this week to bring the benchmark to 9% by the end of 2022.
Turkey is an outlier in a world where policy makers are aggressively raising borrowing costs in response to the biggest inflation shocks in decades.
Despite the biggest surge in consumer prices since 1998, the Turkish central bank surprised by resuming cuts in August following a months-long pause, signaling that the threat of an economic slowdown warrants lower rates.
It described the price pressures as “transitory” and blamed them on the global rally in commodity costs, stoked by Russia’s invasion of Ukraine in February.
But even before the war, inflation in Turkey was approaching 50%, following an easing cycle at the end of last year that slashed rates by 500 basis points. Annual price growth exceeded 83% last month -- nearly 17 times the central bank’s official target.
What Bloomberg Economics Says...
“We see the central bank continuing its easing cycle to reach the political leadership’s target of single-digit interest rates by December. That may be the only target the central bank meets this year.” --Selva Bahar Baziki, economist.
At the same time, policy rates in Turkey have grown increasingly disconnected from monetary conditions across much of the economy. A series of what officials call macroprudential measures have engineered a slowdown in lending with regulatory changes such as the introduction of collateral requirements.
The approach has sought to ensure that credit flows into industries favored by Erdogan, who’s counting on cheap money to increase production and investment as well as create new jobs. The president fired all three of Kavcioglu’s predecessors for taking a line he deemed insufficiently dovish.
As he prepares to vie for another term in office, Erdogan is prioritizing growth over price stability and the lira, this year’s worst performer in emerging markets after Argentina’s peso. The Turkish currency, which has lost over 28% of its value against the dollar so far in 2022, traded little changed on Thursday.
Alongside a fixation on juicing up the economy, Erdogan believes low rates will bring down inflation, a view that’s at odds with conventional policy and so far not borne out by the evidence in Turkey.
Even so, Erdogan said in October that as long as he is president, “interest rates will continue to be lowered every passing day, week and month.”
