Bloomberg: The Turkish Central Bank interest cuts causing the problems to the Turkish lira

The Turkish Central Bank decided on Thursday, to reduce the main interest rate to 16%, exceeding analysts’ expectations.

The Bank’s Monetary Policy Committee decided to reduce the interest rate on repurchases for a week by 200 basis points to 16%, despite warnings of the repercussions of the reduction on the exchange rate of the lira and inflation rates.

The committee cut the interest rate last month by 100 basis points to 18%.

President Recep Tayyip Erdogan last week fired all members of the Policy Committee who opposed his demand for a rate cut.

Immediately, the lira’s exchange rate fell to a new record low.

Bloomberg quoted the Turkish Central Bank as saying that “the recent increase in inflation was driven by factors related to supplies”, describing it as temporary.

The committee noted that its estimates through the end of the year are that “temporary supply factors leave limited scope for a downward adjustment of the rate”.

According to Bloomberg data, the lira fell by 2.9%, before the decline narrowed slightly to 2.3% to 9,435.9 pounds per dollar at 2:15 pm Istanbul time.

Erdogan describes himself as an “enemy” of high interest rates, and believes in the unorthodox hypothesis that lower interest rates lead to lower inflation.