Erdogan “pressed the button”: New interest rate cut and new dip in the pound

Recep Tayyip Erdogan “pressed the button” implementing the expected new interest rate cut by the Central Bank of Turkey.

The Erdogan-controlled central bank cut its key interest rate by 15 percentage points to 15 percent on Thursday, hinting at a new easing despite inflation hovering close to 20 percent, accelerating the pound’s decline to historically low levels.

The central bank, which is believed to have succumbed to President Erdogan’s “urgings” to support the economy despite the risks, as it has “declared war on high interest rates”, continued, as expected, the cycle of interest rate cuts that began in September, when the key interest rate was 19%.

The Turkish currency plunged against the dollar after the decision, falling 3% to 10.98 pounds per dollar, to the historically low level it had reached earlier today. At 13.29 (Greek time), the exchange rate was 10.85 pounds per dollar.

The central bank was expected to cut its key interest rate by one percentage point, according to a Reuters poll last week, although some analysts thought a 9% drop in the pound this week would hold it back from such a decision. The extent of the interest rate cut – by two percentage points – last month took markets by surprise.

Analysts describe the monetary easing as premature and reckless, as real returns become very negative.

The Monetary Policy Committee of the Central Bank stated that the temporary factors that push up inflation – and in terms of supply – will be maintained in the first half of 2022. “The Commission will consider completing the use of the limited margin due to the factors “in December, when it will have its last monetary policy meeting,” he added.

The central bank’s credibility has been eroded in recent years, given Erdogan’s frequent criticisms of high interest rates and the rapid changes in the central bank’s leadership due to differences over policy.

Erdogan pledged yesterday to continue the fight against high interest rates “until the end”, accelerating pound sales reminiscent of the large-scale crisis of 2018.

With the pound depreciating by 38% since the beginning of the year, prices are rising through imports, further boosting inflation, which climbed to 19.89% last month, the highest level in almost three years. Inflation is four times the official 5% target of the central bank, greatly increasing the cost of living for Turks combined with the devaluation of the currency. At the same time, international investors are leaving Turkey, expressing distrust in the stability and resilience of the Turkish economy under Erdogan.

Α –