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Turkish central bank surprises with rate cut sought by Erdogan By Reuters

© Reuters. FILE PHOTO. A logo of Turkey’s Central Bank (TCMB), is pictured in the entryway to the bank’s headquarters at Ankara, Turkey on April 19, 2015. REUTERS/Umit Bektas///File Photo

ISTANBUL (Reuters) – Turkey’s central bank unexpectedly cut its policy rate by 100 basis points to 18% on Thursday, delivering stimulus long sought by President Tayyip Erdogan despite high inflation, and sending the lira to near a record low.

Given that inflation reached 19.25% in March, the central bank was expected to keep interest rates at 19%. Only two economists polled in Reuters’ survey predicted a rate cut.

Erdogan’s March installation of Governor Sahap Kavcioglu at the bank has made him sound less dovish. He opened the doors to Turkey’s first ever monetary easing and ended a 12 month-old tightening cycle.

Kavcioglu, who had previously stressed core inflation (which was less than 17% in August) and said that the policy was sufficient to slow price rises during the fourth quarter.

According to the bank’s policy committee, a rate reduction was necessary due to the core price measures that strip food of other goods and shocks in supply after pandemics.

According to the bank’s policy committee, recent increases in inflation are “due to transitory elements”. The tightening of monetary policy has had a more contradictory impact on commercial loans than was anticipated.

At 1123 GMT the lira was at an all time low of 8.88, and fell to 1.5%. Turkey is experiencing further inflation due to its imports, which are priced in hard currencies.

Trium Capital’s emerging markets portfolio manager Peter Kisler said that while the currency is now weaker, it won’t be able to fall further. However, it doesn’t seem likely you will see it explode completely. There was some positioning.

Although analysts warned of “policy mistakes” due to the central bank’s dovish turn this month, many predicted cuts would occur before year’s end. This month saw a currency devaluation of more than 4.4% due to investors jitters.

Turkish assets have been sold by foreign investors in recent years because of concerns about the central bank’s political independence. Erdogan ousted the previous three governors within a period of 20 months due to disagreements regarding policy.

Erdogan is a self-described enemy of interest rates and said in June that he talked to Kavcioglu regarding the need for an August rate cut. He stated last month that “we will see a drop in rates”.

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Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.