Turkish Lira Nosedived to Historic Lows after Shocking Rate Cut amidst Raging Inflation

Turkey’s Central Bank again astonished global economists by sharply cutting its key interest rate to 13%: under 80% (a 24-year high) consumer inflation the lira broke all-time low and went into free fall.

More specifically, The Monetary Policy Committee, led by Sahap Kavcioglu, lowered its benchmark to 13% on Thursday after setting it at 14% over the past seven months. All 21 economists surveyed by Bloomberg expected no change. According to the statement, the Central Bank made it clear that it is not embarking on a monetary easing cycle, saying that "the updated level of the policy rate is in line with the forecast."

“It is important that financial conditions are favorable to meet the pace of industrial growth and employment growth at a time of increasing uncertainty about global growth, as well as escalating geopolitical risks,” the MPC said in a statement.

The sudden resumption of monetary easing less than a year before the national election reflects the Turkish authorities' determination to honor President Recep Tayyip Erdogan's June pledge to continue cutting rates. The decision comes three weeks after the Turkish central bank raised its inflation forecast for this year by nearly 18 percentage points.

The increase in Turkey's gross foreign exchange reserves by more than $10 billion in just two weeks – after money transfers from Russia for the construction of a nuclear power plant – may have given the central bank confidence that it can cope with the price pressure, especially as policymakers expect inflation will soon peak out.

Kavcioglu blamed the global rise in commodity prices, partly caused by toughening geopolitical tensions in Europe. The central bank now expects inflation to peak around 85% this fall and approach 60% by the end of the year, 12 times its initial target.