Turkey makes surprisingly big rate cut

Central bank takes markets by surprise, cuts interest rates by 4.25 percent despite Erdogan’s controversial belief that doing so increases inflation.

Thursday 25/07/2019

Turkey's former central bank governor Murat Cetinkaya was sacked by President Tayyip Erdogan earlier this month

ANKARA - Turkey's central bank surprised markets on Thursday by cutting its main interest rate by 4.25 percentage points, less than a month after its governor was sacked.

The bank said the one-week repo rate was lowered to 19.75 percent from 24 percent, a bigger cut than the two or three percentage points the markets had been expecting.

Governor Murat Cetinkaya was fired on July 6, having reportedly clashed with President Recep Tayyip Erdogan who opposes high interest rates, and replaced with his deputy, Murat Uysal.

Contrary to orthodox economic thinking, Erdogan claims high interest rates cause high inflation and is calling for lower rates to stimulate growth.

Explaining the decision, the bank said that recent data "indicate a moderate recovery in the economic activity" and pointed to "strong tourism revenues".

The bank said the price outlook "continued to improve" after consumer price inflation fell to 15.72 percent in June from after a 15-year peak of 25.24 percent in October.

The Bloomberg consensus was for a cut of 2.25 percentage points, but economists said there could be any cut ranging between half a percentage point and eight full percentage points.

The Turkish lira appeared to be stable since a cut of some kind was predicted, only falling by 0.24 percent to 5.69 against the US dollar.

Turkey's economy contracted by 2.6 percent in the first quarter of 2019, according to the Turkish statistic institute (TurkStat), after growth of 2.6 percent in 2018.