Turkish lira extends record low as investors bet on rate cut this week

Turkey’s lira fell against the dollar, extending a record low, on expectation that the central bank will cut interest rates for a second month on Thursday even after inflation accelerated.

The lira declined to as low as 9.2955 per dollar, extending losses this year to 20 percent. It was trading down 0.1 percent at 9.2648 per dollar at 10:08 a.m. local time in Istanbul.

Most economists expect the central bank to lower the benchmark interest rate of 18 percent, according to the initial results of a poll reported by Reuters on Friday. The central bank will cut rates by 0.5 percentage points to 17.5 percent, Turkish financial news service Foreks reported on Wednesday, citing the median estimate in a poll of 17 economists. Two economists saw a reduction of 100 basis points while seven predicted no change.

Turkey’s central bank is cutting interest rates - it lowered them from 19 percent in September – even as consumer price inflation accelerates. The dovish policy has made Turkey an outlier in emerging markets at a time when global inflation is climbing. Şahap Kavcıoğlu, appointed as central bank chief by President Recep Tayyip Erdoğan in March, appears to be relenting to government pressure to cut rates to boost economic growth and reduce borrowing costs for companies.  

Bankers and businessmen taking part in a central bank survey of market participants published last week expect policymakers to lower the benchmark rate to 16.6 percent in three months.

Lax economic and monetary policy helped spark a currency crisis in Turkey in 2018 that sparked a painful economic recession. Kavcıoğlu is the fourth central bank governor to be appointed by Erdoğan since he gained vast new executive powers at elections in 2018.

Erdoğan issued a presidential decree dismissing three of the seven members of the central bank’s monetary policy committee on Thursday, two of whom were seen to have opposed last month’s rate reduction. His decision followed an unscheduled Wednesday evening meeting with Kavcıoğlu in Ankara.

Inflation in Turkey accelerated to 19.58 percent in September, the highest level in emerging markets outside of crisis-hit Argentina.

Erdoğan maintains that higher interest rates cause inflation, citing their negative impact on costs for businesses. His view contradicts the commonly held view among economists and central bankers that rate hikes can be used to tame inflation.

Inflation in Turkey is expected to slow towards the end of the year due to favourable base effects. Yet, estimates for year-end consumer price inflation are rising. CPI is expected to slow to 17.63 percent by December, according to last week's central bank survey. The estimate stood at 11.56 percent in March following a series of rate hikes by Kavcıoğlu’s predecessor.   

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