Heeding President Recep Tayyip Erdogan’s politically driven pressure for lower interest rates, Turkey’s Central Bank cut its policy rate by 100 basis points to 18% Thursday despite high inflation and at the risk of further weakening the Turkish lira.

The decision of the bank’s monetary policy committee lacked convincing economic justifications and came as a curveball for financial markets, where most analysts had expected the rate to remain unchanged at 19%. The embattled Turkish lira plunged anew after the announcement, tumbling 1.5% against the dollar to near a record low of 8.88 touched in June before regaining some ground later in the day.

Central Bank Governor Sahap Kavcioglu had signaled a policy shift earlier this month when he played down headline inflation, which hit 19.25% in August, surpassing the bank’s policy rate of 19%, and said the bank would focus on core inflation, which strips out food and energy prices and is more than two percentage points lower, citing extraordinary conditions owing to the COVID-19 pandemic. Though his message was seen as a harbinger of a rate cut, most observers expected the bank to make the move later in the year.



Written by Mustafa Sönmez