Turkey slashes interest rates by 150 basis points despite inflation at 83%

Turkey’s central bank slashed its key interest rate by 150 basis points for the third consecutive month of cuts on Thursday, from 12% to 10.5% — despite Turkish inflation at more than 83%.

Market analysts expected a 100 basis point cut, so the move still managed to take many by surprise despite the increasing regularity of Turkey’s interest rate reductions. Consumer prices for the country of 84 million people climbed to a new 24-year high of 83.45% in September, though many people living in Turkey say prices for basic goods have in some cases more than tripled in the past year.

The country’s monetary policy, directed by Turkish President Recep Tayyip Erdogan, is based on a pursuit of growth and export competition rather than calming inflation. Erdogan vocally espouses the unorthodox belief that raising interest rates increases inflation, rather than the other way around, and has called hiking rates “the mother of all evil.”

The policy consistently provokes criticism and bafflement from economists, and plays a major role in the dramatic weakening of Turkey’s currency, the lira, which has lost roughly 28% of its value against the dollar this year.

The lira was roughly flat after touching an all-time low following the news at 18.615 to the dollar. It’s down 50% against the greenback in the last full year. While Turkey’s current account deficit narrowed in August thanks to help from tourism revenue, it still sits at a sizeable $3.1 billion, according to data from Goldman Sachs.

“The lira remains weak, real yields are artificially low, inflation has surged and the current account remains in deficit. This has caused international investors to abandon the local currency bond market in Turkey in recent years,” Daniel Wood, portfolio manager at William Blair Investment Management, wrote in a note Thursday.

Turkey’s government has pursued alternative strategies to bolster its currency including programs to encourage lira deposits in banks, selling dollars for lira — which has shrunk its foreign exchange reserves — and getting investment and assistance from wealthy Gulf states to fund its currency intervention.

Ankara has also remained friendly with Moscow, attracting waves of Russian millionaires and billionaires as they seek to evade Western sanctions.