Turkish lira flat after shock rate cut weakening

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Istanbul (Reuters) – The Turkish lira was steady against the U.S. dollar on Friday after nearing record lows in the previous session as Turkey’s central bank shocked markets by cutting its main interest rate to 13%.

The currency stood at 18.0985 as of 0703 GMT, nearly flat from its close on Thursday when it weakened by more than 1% and briefly hit 18.15, its weakest since Dec. 20, after the surprise rate cut.

Turkey’s central bank trimmed its benchmark rate by 100 basis points and said it needed to keep driving economic growth despite inflation touching nearly 80% and a monetary tightening trend among its peers worldwide.

“It is important to evaluate rate cut decisions together with the increase in forex reserves in the last couple of weeks. Tourism is very strong and forex income through exporters is high. Apart from that there is an inflow from Russia of around $5-$6 billion,” a senior banker said.

“The central bank could be thinking the reserves will increase further. I want to think they took the rate cut risk with guaranteed foreign financing flow,” added the banker, who was speaking on condition of anonymity.

The bank had held its main rate at 14% for the past seven months after cutting it by 500 basis points towards the end of last year. That policy easing sparked a currency crisis in December that sent inflation soaring. The lira has lost more than 27% against the greenback so far this year.

The central bank’s policy-setting committee said it needed to act because leading indicators pointed to a loss of economic momentum in the third quarter and the new policy rate was “adequate under the current outlook”.

Goldman Sachs analysts said in a note that Turkey’s macroeconomic policy mix had become more unsustainable with the latest decision and forecast annualised inflation to rise to more than 90%.