Turkish lira drops to new low after harsh interest rate cut

ISTANBUL: The Turkish lira plunged to a record low against the U.S. dollar Thursday after a harsher-than-expected cut in interest rates.

The decision by the Central Bank’s monetary committee to cut the rate from 18% to 16% surprised analysts. The lira dropped to 9.45 against the dollar, compounding a long run of losses.

The cut, which came as inflation stands at nearly 20%, will be seen by many as further evidence of the bank’s lack of independence from the government of President Recep Tayyip Erdogan.

Contrary to traditional economic theory, the president has said steep interest rates cause inflation and has declared himself an “enemy” of high borrowing costs.

The lira hit a previous low last week when Erdogan fired three central bank officials responsible for monetary policy. They were said to have opposed the rate-cutting policy at the committee’s September meeting.

Timothy Ash, an emerging markets expert at BlueBay Asset Management in London, described the latest cut as part of an “insane monetary policy experiment,” adding, “It feels like the lira and inflation will suffer the consequences.”

Umit Ozlale, vice chairman of the center-right opposition Iyi Party, said the decision “lacks any economic sense and will only worsen the damage that’s been done. It’s just another affirmation that the Central Bank is reduced to a rubber stamp for President Erdogan’s political ambitions.”

In its announcement of the cut, the central bank blamed a recent rise in inflation on factors such as higher food and import prices, supply chain disruption and recovering demand.

“Nevertheless, the committee assessed that, till the end of the year, supply-side transitory factors leave limited room for the downward adjustment to the policy rate,” it said.