Turkey's central bank cut its key interest rate for the second month in a row by much more than expected, dealing another body blow to the lira's exchange rate, and said there was "limited room" for further rate cuts during the remainder of this year.
The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, the one-week repo auction rate, by another 200 basis points to 16.0 percent following a 100-point cut in September, when the rate was cut for the first time in two years.
The rate has now been cut by 300 points since the current central bank governor, Sahap Kavcioglu, was installed by Turkey's strong-willed president, Tayyip Erdogan, in March after his predecessor Naci Agbal became the third governor to be fired in less than two years.
The rate cut was twice the amount expected by analysts and comes only a few days after the Turkish Industry and Business Association in a report called for a fundamental reform of economic policy making, - a diplomatic but still a clear critique of Erdogan - and underlined the importance of an independent central bank for the country's long-term economic growth and development.
The Turkish lira continued to plummet to new record lows, falling another 1.6 percent in the aftermath of the rate cut to 9.43 to the U.S. dollar.
Since March 20, when Kavcioglu took over the central bank, the lira has lost 22 percent of its value against the dollar to be down 22 percent this year and down 37 percent since the start of 2020.
The fall in the lira illustrates how foreign investors are turning their backs on Turkey, with data from the Institute of International Finance (IIF) earlier today showing capital flows into Turkish bonds and stocks falling since the September rate cut.
The rate cut comes despite the steady rise in Turkey's inflation rate, which is now almost four times the bank's medium-term target of 5.0 percent.
Headline inflation rose to 19.6 percent in September, the highest rate since March 2019, from 19.25 percent in August while core inflation - which Kavcioglu recently has emphasized - rose to 16.98 percent from 16.76 percent.
CBRT said the recent rise in inflation was driven by higher food and import prices, especially energy, along with supply-side constraints, higher administered prices and stronger demand.
"It is assessed that these effects are due to transitory factors," the bank said, adding the impact of past monetary tightening was having a dampening impact on credit and domestic demand along with commercial loans and personal loan growth.
As in September, the central bank said it would "continue to use decisively all available instruments" until there is a permanent fall in inflation and the medium-term inflation target is achieved.
"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," CBRT said.
Turkey's economy has continued to grow since the second quarter of last year, with its gross domestic product up 21.7 percent year-on-year in the second quarter of this year from 7.2 percent in the first quarter.
"Leading indictors show that domestic economic activity remains strong, with the help of robust external demand," CBRT said, adding domestic vaccinations have helped a recovery of services, tourism and related sectors.