Turkey's central bank shocked markets again by slashing its policy rate by 200 basis points to 16% on Thursday, sending the lira to a new all-time low and delivering the easing demanded by President Recep Tayyip Erdogan despite rising inflation.
The bank said there would be little room for more rate cuts this year given what it called transitory price pressure on food, energy and other imports, which have sent Turks' living costs soaring as the currency depreciated.
The rate cut was twice as much as the most dovish estimate in a Reuters poll, which forecast the policy repo rate would fall by only 50 or 100 basis points.
The central bank, under pressure from Erdogan who has replaced much of the bank's top leadership this year, also surprised markets last month with a 100-point cut that sent the lira tumbling to new depths.
Analysts called the latest cut reckless given it left Turkey's real yields sharply negative, and it runs against the grain of a world in which central banks are raising rates to head off a global inflation spike.
"The move is consistent with Erdogan's view, but his monetary policy is simply wrong and now we are running the risk of ... the real economy getting seriously hurt by the currency," said Ulrich Leuchtman, analyst at Commerzbank in Frankfurt.
"All this can only end in a lira crash," he said.
The lira weakened as much as 3% to a record 9.501 versus the dollar before paring some losses. It has shed 22% this year, with most of the drop since the beginning of September when the bank began giving dovish signals.
Erdogan has long called for monetary stimulus to boost credit, exports and jobs and has sacked the last three central bank governors in less than 2-1/2 years, eroding the bank's credibility and sending foreign investors fleeing.
A self-described enemy of interest rates, Erdogan fired three more monetary policy committee (MPC) members just last week - including two seen to oppose rate cuts - setting the stage for more easing.
After the policy meeting, the MPC said "supply-side transitory factors leave limited room for a downward adjustment to the policy rate until the end of the year."
