Türkiye’s central bank on Thursday surprised the markets as it slashed its benchmark policy rate by 100 basis points, against the backdrop of soaring inflation running at a 24-year high.
The Central Bank of the Republic of Türkiye (CBRT) spelled out its sharp focus on economic growth as it unexpectedly lowered its one-week repo rate to 13% from 14%, the level it was kept at for the last seven months.
In a statement accompanying the decision, the bank said the cut was aimed at driving economic growth and sustaining employment amid growing geopolitical risk. It added that rising loan rates have diminished the effectiveness of the monetary policy.
Most economists expected the key lending rate to remain steady through year-end. The CBRT delivered a series of cuts last year, slashing rates by 5 percentage points before pausing the easing cycle in January.
The central bank’s policy-setting committee (MPC) said it needed to act because leading indicators pointed to a loss of economic momentum in the third quarter.
"It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk," it noted.
The new policy rate "is adequate under the current outlook," it said, adding the growing gap between its policy rate and rising loan rates was reducing "the effectiveness of monetary transmission."
The Turkish lira weakened by nearly 1% against the United States dollar shortly after the interest rate decision. The lira, which was down 0.2% at around 17.96 to the dollar just ahead of the decision, slipped to 18.09.
Türkiye’s annual inflation rose at a slower-than-expected pace in July but still reached a fresh 24-year high of nearly 80%, stoked in part by surging energy prices due to Russia’s invasion of Ukraine.
The bank said inflation is driven by the lagged effects of rising energy prices, pricing formations not supported by economic fundamentals, and negative supply shocks.
It repeated that disinflation should begin thanks to steps the bank and other authorities have taken to cool some forms of credit, along with an eventual end to the war.
The CBRT last month raised its year-end inflation forecast to 60.4% and saw it peaking near 90% in the autumn.
The government has been affirming its commitment to boosting production, exports and employment with a low-rates policy, and has promised a current account surplus that is said to eventually steady the Turkish lira and cool inflation.
President Recep Tayyip Erdoğan recently defended the policy of lower borrowing costs, insisting that it had helped save 10 million jobs. He has promised to lower inflation, asking for the public to show patience.
Erdoğan in June vowed that his government would continue lowering interest rates rather than increasing them.
The Turkish leader is known for his opposition to higher borrowing costs, which he says only makes "the rich richer and the poor poorer."
The central bank vowed on Thursday to push ahead with its "liraisation strategy," aimed at reducing the use of foreign currency.
It vowed to "continue to use all available instruments decisively within the framework of liraization strategy until strong indicators point to a permanent fall in inflation."