ISTANBUL - The Turkish central bank cut its key interest rate for the second straight meeting on Thursday, pushing the lira to a record low even as business leaders question the direction of monetary policy under President Recep Tayyip Erdogan.
The bank lowered the one-week repo rate to 18% from 16%, despite the lira plumbing new lows over the past several weeks. The Turkish currency weakened against the dollar at one point following the decision on Thursday.
The move comes as Erdogan, who has called interest rates the mother of all evil, ramps up pressure on the central bank to stimulate the economy.
When inflation runs high and currencies are in free fall like the lira, monetary authorities typically look to rate hikes as a remedy. Turkey has moved in the opposite direction.
Business leaders are voicing concerns, taking an unusually critical stance on the longtime president's policies. Corporate executives called for a course change in monetary policy at a Tuesday meeting of the Turkish Industry and Business Association, or Tusiad.
Most important steps are strengthening institutions and rules of market economy, starting with the independence of regulatory institutions like the central bank, said Tuncay Ozilhan, chairman of Tusiad's high advisory council.
Omer Koc, chair of leading Turkish conglomerate Koc Group, said there was no alternative but to bring down the exchange rate, high costs and inflation, according to remarks published on the company website.
It is very saddening to see how much our citizens get exhausted by the ever increasing inflation pressure, Koc said. We have to adopt a strong reform agenda like we did in the first 10 years of the 2000 s and reduce our country risk. The Turkish currency has depreciated by roughly 20% against the dollar since the beginning of the year, which in turn has pushed up the price of fuel and other imports. The consumer price index is now almost 20% higher than it was a year ago.
The central bank has said temporary factors are driving inflation. Even as the U.S. Federal Reserve and other central banks began moving to tighten monetary policy against rising inflation, Turkey surprised markets by cutting its key rate from 19% to 18% in September. Turkey's real interest rate is now in negative territory.
Erdogan has replaced the central bank chief three times in less than two and a half years and dismissed three members of the bank's monetary policy committee just this month, including two deputy governors. Speculation about further easing has only increased downward pressure on the lira.
Turkey's economy has grown rapidly under Erdogan's nearly two-decade leadership, with mainly the construction industry benefiting from low borrowing costs. The economy is forecast to expand 9% in 2021.
However, the pursuit of growth at the expense of the lira has not gained widespread public approval. Support for Erdogan's ruling party sank to a record low 23% in an October poll by Istanbul Economics Research.
The depreciation-inflation strategy drives discontent from a majority of the society, Hakan Kara, a former chief economist at the central bank, told Nikkei.
Moreover, long-term interest rates do not fall because of heightened inflation risk. In that sense, I think the traditional strategy of gaining votes by forcing central bank to lower rates has expired, Kara said.