Turkey’s central bank cut its policy rate by a staggering 200 basis points Thursday, sending the embattled Turkish lira to a new all-time low and raising the specter of deeper economic turmoil in the country.

The bank’s monetary policy committee lowered its key one-week repo rate to 16% from 18%, heeding President Recep Tayyip Erdogan’s pressure for lower interest rates despite an annual inflation just shy of 20%. The move followed a 100-basis-point reduction in September and the dismissal of senior central bankers last week, which had already caused the lira to tumble.

The currency, which has lost about 20% of its value this year, dropped as much as 2.9% to a record low of 9.48 versus the dollar Thursday afternoon after the bank announced the cut.

Many now wonder whether Ankara has tacitly resigned to further depreciation of the currency despite its bruising impact on the fragile, import-reliant Turkish economy. Conventional wisdom dictates that Ankara should rein in the increase of foreign exchange prices as it fuels cost-push inflation and heightens the cost of rolling over foreign debt and other public liabilities denominated in hard currency.

Taking hints from the government’s medium-term economic program, some observers and economic actors have come to argue that Ankara is knowingly allowing the lira to cheapen. Others, however, believe that Ankara is in a state of capitulation, lacking the means to defend the currency. With Erdogan bent on lowering interest rates to stimulate growth and the central bank’s foreign reserves depleted, Ankara has no option but to acquiesce to the slump of the lira, they say, warning of a continued rise in inflation and deeper economic woes.


Written by Mustafa Sönmez