The Turkish lira recorded one of the biggest declines of the year amid speculation that the central bank intends to cut its key interest rate despite rising inflation.
Inflation continued its acceleration and last month reached 19.25% at the annual pace, its highest rate in two years, exceeding the bank’s reference interest rate of 19%.
The central bank has been promising for months to keep interest rates positive so that Turks do not feel motivated to spend money instead of depositing it in their accounts.
This requires raising the key interest rate to 19.5 percent at the next monetary policy meeting on September 23.
But Central Bank Governor Şehab Cavusoglu told investors that consumer prices are expected to fall in the coming months and the bank will adopt a key inflation rate, which is below 17% after excluding volatile items such as food and fuel, in future decisions.
Turkish media quoted Kavucioglu as saying that “exceptional circumstances that emerged due to the pandemic have increased the importance of the main inflation indicators.”
He added, “While determining the position of global monetary policy, the basic indicators, with the exception of temporary factors arising from sectors outside the scope of the influence of monetary policy, are taken as a basis.”
The Turkish night rate fell 1.5% against the US dollar and was trading around 8:45 on Wednesday afternoon.
Turkey’s central bank is in principle independent, but it is under constant pressure from President Recep Tayyip Erdogan to cut interest rates.
The Turkish president has fired three bank governors since 2019 because they were either raising the cost of lending or not lowering it fast enough.
Raising the interest rate is one of the main tools of monetary policy to combat inflation, but Erdogan strongly opposes this and sees it as hampering growth.
Contrary to classical economic theories, Erdogan sees higher interest rates fueling higher prices.
Cavusoglu kept the key interest rate unchanged for five months and earlier vowed to focus on fighting inflation.