Aurelia Butler

Investing.com — Turkey’s central bank cut its key interest rate by a full percentage point on Thursday despite the country suffering 80% inflation.In a statement accompanying the decisions, the bank justified its action by pointing to an expected growth slowdown in the current quarter and expectations that a process of disinflation will soon set in after a surge in prices in the spring triggered by Russia’s invasion of Ukraine.The bank cut its one-week repo rate to 13% from 14%, after holding it steady for the past year. It also cut its overnight deposit and lending rates, which form a corridor for short-term lira market rates, by a similar amount to 11.50% and 14.50% respectively.The announcement hit the lira, which has been badly undermined by a decade of unorthodox and often erratic macroeconomic policies under President Recep Tayyip Erdoğan. The dollar spiked as high as 18.1488 against it before paring its gains to be up 0.7% at 18.0759 by 08:00 ET (12:00 GMT). The benchmark BIST 100 stock index fell sharply before recovering to trade roughly where it was before the announcement. Credit default swaps on the country’s sovereign bonds, meanwhile, widened by around 50 basis points.The lira is already down some 27% against the dollar so far this year against the backdrop of runaway inflation that the central bank has been unable to tackle effectively. The consumer price index was up 79.6% in the 12 months through July, setting the stage for what would be a second currency crisis in only four years. Erdoğan fired his last central bank governor for failing to accommodate his economic stimulus policies by keeping interest rates too high as the effects of the 2018 currency crisis eased.In its statement, the CBRT said it expects a “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,” in what appeared to be a nod to Erdoğan’s role in helping the UN to broker a deal allowing Ukraine’s grain exports to reach world markets. The conflict between Russia and Ukraine continues, but that deal has helped allay fears of food shortages in many poor countries that are dependent on Ukraine and Russia for wheat imports. U.S. Wheat Futures are now below their levels immediately before the invasion in February.That, along with the global drop in energy prices since the middle of the year, has taken some of the steam out of Turkish inflation, which ran at a monthly rate of ‘only’ 2.37% in July, down from a peak of 13.6% in January and its smallest increase since October last year.Even so, analysts were baffled by the decision.”Just when you think the CBRT cannot get any crazier, they go to yet another level of craziness,” said Tim Ash, an associate fellow at Chatham House in London. More

Turkey has surprised markets with a 100 basis point interest rate cut despite inflation of nearly 80 per cent, as the central bank loosens policy further to spur growth ahead of a general election next year.The bank had been expected to keep the rate at 14 per cent, which has already pushed Turkish yields into deeply negative territory, according to a poll by broadcaster Bloomberg HT. Instead, policymakers lowered the rate to 13 per cent, saying they were concerned about the possibility of slowing economic growth.“Leading indicators for the third quarter point to some loss of momentum in economic activity,” the bank said in a statement on Thursday. “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.” The lira dropped about 1 per cent to as low as 18.14 against the US dollar, the weakest level on an intraday basis since a severe slide late last year. The currency has tumbled more than 25 per cent in 2022 as scorching inflation and deep concern over the central bank’s unorthodox monetary policy has prompted foreign investors to flee the market. Turkey has been bucking the trend of other central banks that are raising borrowing costs to rein in global inflation. Şahap Kavcioğlu, the central bank governor, supports President Recep Tayyip Erdoğan’s unusual theory that high interest rates cause inflation, while mainstream economists subscribe to the opposite view.Kavcioğlu, who took the helm at the bank last year, began easing monetary policy in September, cutting rates from 19 per cent. That has unleashed Turkey’s highest inflation in a quarter century. Rates, until Thursday, had been unchanged at 14 per cent since December.In recent weeks, the central bank has recorded a sharp rise in its foreign currency reserves, helped by inflows from governments abroad, according to the finance minister. This may have encouraged Kavcioğlu to cut rates again, even though the bank’s coffers remain about $61bn in the red, when liabilities to other banks are accounted for, according to Goldman Sachs estimates. More

LIMA (Reuters) – Since 2011, Peruvians have lived under seven presidents and seen four ex-leaders detained or wanted on corruption allegations. Yet, in the same period Peru has held onto the unlikely title of the fastest growing major economy in Latin America. That period of standout growth is set to end this year, an analysis of World Bank data and International Monetary Fund forecasts shows, with Colombia overtaking Peru.Slowing growth at the world’s No. 2 copper producer underscores a painful truth: Peru’s economy is finally beginning to crack after years of increasingly disruptive political crises that have peaked under President Pedro Castillo and a combative Congress, hurting both private and public investment. Global economic pressures like inflation prompted by the pandemic have hit Latin America hard, but the mood has turned particularly sour in Peru. Investor confidence is lower than during the Great Recession and nearing the pandemic’s record low, even though business performance continues to improve, monthly polls from Peru’s central bank analyzed by Reuters show.”I think that there is no other option but that the government is affecting (economic) expectations because companies are doing fine,” said Pedro Francke, Castillo’s inaugural finance minister who resigned earlier this year. Castillo took office last July, spooking investors on the campaign trail with a plan to radically redistribute wealth and redraft the constitution. But he ultimately handed the economy to moderate finance czars and has passed no meaningful economic reforms. Graphic: Peru has led GDP growth in Latam. That is set to end https://graphics.reuters.com/PERU-ECONOMY/zdvxozjympx/chart.png His administration and close associates are now besieged by scandals. Castillo himself is facing six criminal investigations, one of them for alleged obstruction of justice in the firing of a minister. Congress has twice impeached him but failed to oust him.While Peru is used to turmoil and in 2020 cycled through three presidents in nine days, market analysts say its economy is finally facing what may prove an insurmountable test. “Politics and the economy can no longer be treated separately in Peru,” Fitch said in a report this week.Peru’s finance ministry declined to comment. To be sure, Peru is expected to remain among Latin America’s top performing economies, according to the International Monetary Fund. Meanwhile, Moody’s (NYSE:MCO), Fitch and S&P all told Reuters they do not see imminent risks of a downgrade to Peru’s investment-grade rating. Peru’s largest corporations, including lender Credicorp (NYSE:BAP) and miner Sociedad Minera Cerro Verde, have presented solid earnings so far this year. Still, Peru’s finance ministry is set to lower its growth expectations for 2022 later this month from 3.6%, according to newly appointed Finance Minister Kurt Burneo who first suggested it could be as low as 2.2% but has since said it might be a bit higher. “Today Peru is facing one more stress test…but what we won’t be able to save is economic growth,” said David Tuesta, the President of the Private Competitiveness Council, a think tank funded by business interests. Graphic: Peruvian business confidence is nearing a record low https://graphics.reuters.com/PERU-ECONOMY/dwpkrwqgqvm/chart.png A POPULIST WHO CAN’T SPENDCastillo came to power promising to hike spending, fund new social programs and raise taxes on the mining industry. But his administration has actually overseen slower public spending despite record tax revenues, while Congress shelved the mining tax reform. Peru’s fiscal deficit now sits at a very conservative 1% of GDP, a dramatic reduction from 8.9% just two years ago, all accomplished without an austerity policy in place. “The bad news is that the deficit reduction is…because of the inability of this government to spend even on things that it wants to spend on,” said Jaime Reusche, a vice president at Moody’s. Peru’s central government spending has contracted 5% so far this year compared to last year, when Castillo was not yet in power, amid record turnover in senior government roles. Graphic: Peruvian families are notably pessimistic about the economy https://graphics.reuters.com/PERU-ECONOMY/mopangbzova/chart.png Less than two weeks into the job, Finance Minister Burneo said in an op-ed that Peru is risking a recession if it does not increase spending and criticized the central bank for hiking rates to combat inflation. While many analysts have predicted that Castillo may not finish his term in 2026, opposition lawmakers have said that they lack the votes to oust him. But even if they did, Castillo’s removal may not shake up the economy, or change its trajectory toward slower growth.”It shouldn’t have a major impact on economic activity and on real growth,” Reusche said. More

Even as inflation rose to nearly 80% in July, the bank slashed its key rate to 13% from 14%. “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,” the bank’s monetary policy committee said.”Accordingly, the Committee has decided to reduce the policy rate by 100 basis points, and has assessed that the updated level of policy rate is adequate under the current outlook.”It added that “the recent increase in spread between policy rate and the loan interest rate is considered to reduce the effectiveness of monetary transmission”. More

Pakistan banned the import of all non-essential luxury goods in May to avert a balance of payments crisis and stabilise the economy.”We’re lifting curbs on all imports,” Ismail told a news conference in Islamabad, saying the policies his government introduced to stabilise the economy had worked well. He said Pakistan’s foreign reserves will rise with funding expected from the International Monetary Fund (IMF). He said the IMF board will meet on Aug. 29 to decide whether to approve the seventh and eighth reviews, which would allow the disbursement of more than $1.1 billion to Pakistan.The IMF also announced on Wednesday that the board will meet later this month.Pakistan’s central bank reserves have fallen as low as $7.8 billion, which would cover little more than a month of imports. More