Turkish Central Bank Rate Cut

November 18, 2021

Turkish monetary policy has become very politicized this year, conforming to the wishes of President Erdogan’s view that inflation conforms positively, not inversely, to changes in the central bank interest rates. Erdogan has secured his desired downtrend in Turkey’s one-week repo rate by replacing policymakers at the Central Bank of Turkey who disagreed with him. Today’s full percentage point cut to 15.0% followed reductions of two percentage points in October and one percentage point in September, and the new rate level is at its lowest in twelve months. Meantime, Turkish consumer price inflation has accelerated from 14.6% last December to 19.9% as of October, and PPI inflation over the same span shot up from 25.1% to a 232-month high of 46.3%.

In a released statement, officials warn that “transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases will persist through the first half of 2022” but insists that restoring price stability remains the primary central bank goal and insists that with the policy rate at 15%, the stance is sufficiently restrictive. Moreover, there is a strong hint that another rate cut will be enacted in December. The trio of rate cuts totaling 400 basis points since September, to be sure, remains small relative to a string of hikes between September 2020 and March 2021 totaling 1075 basis points. But the reality is that the Turkish economy now finds itself in a vicious self-reinforcing cycle of currency depreciation and rising domestic inflation, and the perceived political meddling of monetary policy is also fueling the climb in inflationary expectations. The medium-term 5% inflation target lacks credibility, and the lira tumbled today to another record low of 10.9836 per dollar.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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