Turkey's central bank surprised markets once again with its decision Thursday to cut its key interest rate.
The country's monetary policymakers decided to reduce the one-week repo rate by 100 basis points. Turkish inflation rate was recorded at 80.2% in August, making it the highest level in 24 years.
In August, Turkey lowered interest rates by 100 basis points, setting off a currency crisis.
The updated level of policy is adequate according to the central bank. As growth and demand continued to slow, it was necessary for the cut to be made.
Markets should expect the deflation process to start on the back of the measures taken.
The policy direction has long stunned investors and economists, who say the refusal to tighten policy is a result of political pressure from the Turkish President, who has long railed against interest rates and turned against economic orthodoxy.
The months-long campaign to continuously lower rates as Turkey's trade and current account deficit balloons has instead sent Turkey's currency, the lira, into a multi-year tailspin.
Since the beginning of the year, the lira has lost 27% of its value to the dollar. The currency fell a quarter of a percentage point to a record low of 18.37 to the dollar after the rate decision was announced.
The lira is predicted to fall further. According to Capital Economics, it will fall to 24 against the US dollar by March 23,23.
Liam Peach, the firm's senior emerging markets economist, told CNBC that room for further easing is becoming increasingly limited. Turkey is dependent on foreign capital to finance its current account deficit. The central bank is not in a position to step in because of the low foreign exchange reserves.
Peach warned that cutting interest rates will make it harder for Turkey to get capital flows.
Inflation will fall by the end of the year according to the president. Inflation is not a problem. The president said during an interview that he is an economist. By no means is he an economist.
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