(Bloomberg) — The Turkish lira blew past another record low after the central bank cut interest rates for a fourth straight month, a move that risks jeopardizing currency stability and stoking inflation already running at the fastest pace in three years.
The lira fell as much as 5.4% to 15.6583 against the dollar after the decision. Under pressure from President Recep Tayyip Erdogan, officials cut the one-week repo rate by another 100 basis points to 14%, in line with the median estimate in a Bloomberg survey.
While the currency pared some losses after the central bank said it had exhausted the ‘limited room’ it had for interest-rate cuts, analysts were not convinced that was enough to put an end to the slide. The lira has lost almost half its value since an easing cycle kicked off in September and is on track for its biggest annual depreciation since a financial crisis in 2001.
The phrasing around the duration of the pause in the easing cycle was “less aggressive than we would have hoped for,” said Simon Harvey, a senior FX market analyst at Monex Europe Ltd. Today’s decision “won’t ease pressure on the lira,” he said.
Turkey’s key policy rate now stands around 7 percentage points below consumer inflation. That’s spurring demand for dollars as concern grows that Erdogan’s drive for easy monetary policy will debase the local currency and erode savings. Contrary to orthodox economic theory, the Turkish president believes that low rates curb rather than spur inflation.
The central bank carried out four direct interventions by selling dollars on the market over the past two weeks, to help stem the depreciation. Officials have slashed borrowing costs by 500 basis points since September, even as inflation accelerated to 21.3% last month, more than four times the official target.
“Rising inflation prints in the first quarter will only embolden short-selling in TRY as markets are still convinced that Erdogan, and his preference for lower rates, is driving the decision behind rates,” Harvey said.
Turkey’s benchmark stock index rose as much as 2.8% after the decision. The gauge has rallied more than 30% over the past month to an all-time high as investors piled into equities to hedge against inflation.
(Updates prices, adds analyst voice.)
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