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The Turkish lira suffered one of its biggest drops of the year on Wednesday due to speculation the central bank was on the verge of cutting rates in the face of soaring inflation.
Turkey’s annual inflation rate accelerated to 19.25% last month, above the central bank’s key rate of 19%.
The central bank has been pledging for months to keep real interest rates positive so that Turks do not have an incentive to spend money instead of putting it in their accounts.
That would force it to raise its key rate to at least 19.5% at its next political meeting on September 23.
But central bank governor Sehap Kavcioglu told investors that consumer prices are expected to fall in the coming months and that the bank will now use “core” inflation – which is below 17% after excluding volatile elements such as food and fuel – in future decisions. .
“The extraordinary conditions that have occurred due to the pandemic have increased the importance of core inflation indicators,” Kavcioglu said, quoted by Turkish media.
“In determining the direction of global monetary policy, basic indicators excluding temporary factors resulting from areas outside the sphere of influence of monetary policy are taken as a basis.”
The Turkish lira lost as much as 1.5% against the dollar and was trading around the 8.45 mark on Wednesday afternoon.
Turkey’s central bank is nominally independent but has come under constant pressure from President Recep Tayyip Erdogan to cut interest rates.
The Turkish leader has fired three central bankers since 2019 because they either raised borrowing costs or did not reduce them quickly enough.
Erdogan is famous for subscribing to the unorthodox belief that high interest rates cause inflation instead of reducing it by increasing the cost of doing business.
Kavcioglu kept the bank’s key rate unchanged for five months and previously pledged to focus on fighting inflation.
But Erdogan has indicated that he expects borrowing costs to start coming down quickly to help spur growth.
Timothy Ash, analyst at BlueBay Asset Management in London, said Kavcioglu’s comments showed that his “promise to keep real interest rates positive doesn’t really mean anything from a market perspective.”
âHe’s obviously determined not to raise rates if he can get away with it in any way, and he will drop as soon as possible,â he said in an email to clients.
The central bank this week raised its year-end inflation forecast to 16.2% from 14.1%.
Analysts expect Turkey’s economy to grow by around eight percent this year.
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