Turkey’s central bank governor Şahap Kavcıoğlu has lost further credibility with this week’s unexpected decision to cut interest rates, according to Bloomberg.
Turkey’s central bank said on Thursday that its benchmark interest rate would fall by 100 basis points to 18 percent, surprising analysts after five months of no change.
Ima Sammani, a foreign exchange analyst at Monex Europe told Bloomberg that the rate cut was a “large concern” for the central bank’s credibility, and this was reflected in the falling value of the Turkish lira against the dollar.
Turkey’s domestic currency hit a record low following the central bank’s announcement, breaching the previous nadir of 8.8 per dollar set in early June after President Recep Tayyip Erdoğan called for interest rate cuts.
Erdoğan, who advocates the unorthodox economic theory that high interest rates fuel rather than curtail inflation, has replaced three central bank governors in a little over two years, sacking Kavcıoğlu’s predecessor in March after he raised the bank’s base line rate to 19 percent.
“Mr. Kavcıoğlu will have been well aware of what happened to previous (central bank) governors that defied President Erdoğan’s desire for rate cuts and may have moved on policy to save his job,” Jason Tuvey, a Senior emerging markets economist at Capital Economics, told Bloomberg.
Kavcıoğlu had previously stated his intention to keep interest rates at or above current and anticipated inflation, which accelerated to 19.25 percent last month, but analysts believe the central bank governor may no longer be able to resist further rate cuts.
The central bank “may try to impose its view on the market and cut rates further in the coming months”, Bloomberg cited senior FX analyst at In Touch Capital Markets Piotr Matys as saying. “But it’s unlikely to work, as the sharp spike higher in USDTRY illustrates.”
Turkey could again use its foreign currency reserves to defend the value of the lira, but when these fall dangerously the central bank may be left with little option other than to raise interest rates, Matys said. “We’ve seen this before and it always ends in the same way.”