Turkish central bank cuts rates again as currency falls

The monetary policy committee of Turkey’s central bank again cut policy rates despite rising inflation, days after the country’s president fired three senior officials.  

The MPC cut the policy rate by 200 basis points to 16% today (October 21), having cut it by 100 basis points last month. The latest cut comes just over a week after Turkish president Recep Tayyip Erdoğan dismissed two central bank governors and one MPC member.  

He fired deputy governors Uğur Namık Küçük and Semih Tumen, and an MPC member, US-based economist Abdullah Yavas, late on October 13. Some observers in Istanbul said Küçük had voted against the MPC’s September rate cut, while  Yavas missed the meeting, reportedly because he was ill with Covid-19.  

Erdoğan has dismissed three central bank governors, saying each time that he did so for their failure to cut policy rates. Several Istanbul-based journalists reported in recent weeks that the president was preparing to dismiss current governor Şahap Kavcıoğlu before he sacked the other officials.  

The Turkish president appointed Kavcıoğlu on March 20 after dismissing Naci Ağbal, days after the MPC had raised policy rates. The Turkish president has repeatedly stated that higher interest rates cause inflation, and attacked those in favour of tighter monetary policy in inflammatory terms.  

Erdoğan appointed Taha Çakmak as deputy central bank governor and Yusuf Tuna as MPC member on October 15. He has yet to name a second replacement deputy governor, which currently leaves the MPC with six members.  

The Turkish lira fell sharply after the policy rate cut, reaching a new low against the dollar of 9.45.  The lira traded at 3.06 against the dollar five years ago, but has since lost over two-thirds of its value.  

Turkey’s official year-on-year inflation rate reached 19.58% in September, well above the CBRT’s medium-term target of 5%. Several well-placed observers have told Central Banking they believe Turkey’s government has successfully pressed the official statistical agency to understate the actual rate of inflation.  

The MPC issued a statement which, as in September, listed a number of inflationary pressures but said it had decided to cut the policy rate. “Nevertheless, the Committee assessed that, till the end of the year, supply-side transitory factors leave limited room for the downward adjustment to the policy rate,” the statement said. 

The statement does not rule out further policy rate cuts this year. Observers of the Turkish economy are increasingly in agreement president Erdoğan’s wishes are  the main factor driving monetary policy.