Turkish central banker warns of interest rate cuts; lira slips to 10 to euro again

Timothy Ash, an analyst at BlueBay Asset Management in London, said Kavcioglu’s comments showed that his “promise to keep positive real interest rates means nothing really from a market perspective”.

“He is obviously determined not to hike rates if in any way he can get away with it, and will cut at the very earliest opportunity,” he said in an email to clients.

President Recep Tayyip Erdogan is of course behind the announcement as he has made several remarks recently about “how low interest rates help reduce inflation.”

Erdoğan faces re-election in 2023, has seen his job approval rating slide during the Covid-19 pandemic, which has caused mass unemployment. He sees economic growth, regardless of the cost in economic well being for the population as a whole, to make him popular again.

The Turkish central bank had repeatedly committed to keeping interest rates above the headline inflation rate, because currently interest rates are effectively negative. But the use of core inflation as the basis for interest rate decisions simply leaves out the components that are driving inflation in Turkey — food, above all, for which prices are at record highs, as is oil.

The central bank next meets on interest rates on September 23.