Turkish President Recep Tayyip Erdogan.

The US dollar climbed against Turkey’s lira on Thursday after Turkey cut its key interest rate. 
The rate cut came as a surprise to the markets as Turkish inflation hit 79.6% in July. 
Turkey’s central bank said it expects a ‘disinflation process’ to begin. 

Turkey’s central bank on Thursday cut its benchmark interest rate by 1 percentage point, an unexpected move that sent the lira lower against the US dollar as that country’s inflation rate stands near 80%.

There’s been “some loss of momentum in economic activity,” and a disinflation process should soon set in, the Central Bank of the Republic of Turkey said in a statement about its rate-cut decision. The benchmark rate was reduced to 13% from 14%, confounding the expectations of all 21 economists in a Bloomberg survey who had expected no rate change. 

The dollar gained ground against Turkey’s currency, rising as much as 0.9% to 18.1185 and leaving the lira near a record low versus the greenback. 

“You want to know who is plowing a lot of money into the market today? The Turkish central bank,” John Kicklighter, chief strategist at DailyFX.com, said in a Twitter posting. “The surprise 100bp cut to 13% earlier today (despite inflation of ~80%) has *only* pushed $USDTRY up by 0.8%.”

The decision by the Monetary Policy Committee, led by Governor Sahap Kavcioglu, was made as inflation stood at 79.6% in the 12-months through July in part on the back of rising energy costs.  Energy prices worldwide have surged this year in the wake of the invasion of Ukraine by major oil producer Russia. 

“The Committee expects disinflation process to start on the back of measures taken and decisively implemented for strengthening sustainable price and financial stability along with the resolution of the ongoing regional conflict,” the central bank said. 

Turkish President Recep Tayyip Erdogan has been staunchly opposed to rate hikes and has pressured the central bank to keep rates low. But a depreciating lira could exacerbate Turkey’s inflation by making imports pricier, especially as the country remains reliant on overseas energy products. 

Meanwhile, there’s been an uptick in Russian crude imports at ports in Turkey and other countries in the Mediterranean region, hitting multi-week highs at the start of August. 

“It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk,” said the central bank.

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