Status: October 21, 2021 2:10 p.m.
The Turkish central bank has lowered its key interest rate surprisingly significantly. The move is causing turbulence on the foreign exchange market: the Turkish lira is falling to new record lows against the dollar and the euro.
As expected by almost all experts, the Turkish central bank has lowered the key interest rate significantly despite high inflation rates. However, the interest rate hike turned out to be even more drastic than expected: The key interest rate will be reduced by 2.0 percentage points to 16.0 percent, the central bankers said. Economists had only expected a drop to 17.0 percent on average.
Everyone knows that the central bank should not lower the key interest rate any further, but increase it, says Piotr Matys, foreign exchange expert at InTouch Capital, to the Bloomberg news agency. In later years, economics students would learn from the example of the Turkish central bank how important a credible independent central bank is for a country’s monetary policy, according to Matys.
The market analyst was responding to the consensus prevailing among economists that a central bank should raise the key interest rate in accordance with the rules of the doctrine when inflation is high. Turkish President Recep Tayyip Erdogan has been interfering in Turkish monetary policy for a long time, is an avowed opponent of this thesis and describes himself as an “interest enemy”. He believes that lowering the key interest rate will also help reduce inflation.
Erdogan is looking for suitable staff
The independence of the central bank, which experts attach great importance to, seems to play only a minor role for Erdogan. On the financial markets, his actions give the impression that he is looking for the right staff to implement his ideas.
He had already exchanged three central bank governors within two and a half years. In mid-March, Erdogan surprisingly fired central bank chief Naci Agbal and replaced him with current chief Sahap Kavcioglu, who is an avowed opponent of a tight monetary policy.
Last week, the president also dismissed the two deputy central bank governors Semih Tumen and Ugur Namik Kücük, as well as Abdullah Yavas, the most experienced member of the monetary policy committee. Kücük and Yavas had last upset Erdogan because they had resisted the interest rate cut decided last month.
Economist Arda Tunca from the financial services provider Eko Faktoring commented that the personnel rogue “strongly suggests that the central bank is no longer able to control Turkey’s monetary policy”.
Weak lira exacerbates inflation
Turkey is currently struggling with a sharp devaluation of the Turkish lira, the inflation rate for September is 19.6 percent compared to the previous year. “The central bank’s policy of lowering interest rates despite rising inflation and falling exchange rates is likely to exacerbate both of these problems,” warned the analysts from the research firm Stratfor. The assessment is correct: after the interest rate hike was published, the lira fell to new record lows against the dollar and the euro
The devaluation of the lira harbors an inflation risk, as Turkey is dependent on imports – inflation is imported, so to speak. Raw materials in particular are usually paid for in dollars, but foreign exchange is also required for other imported goods. An increase in the key interest rate, on the other hand, could have supported the rate of the currency, which would then have become more attractive for investors.
According to the Institute of International Finance (IIF), the inflow of foreign capital dried up in September when the central bank surprisingly cut the key interest rate. Since then, investors have withdrawn money on a large scale, said IIF economist Jonathan Fortun.