NEWS Finance        22/04/2020

Turkish Central Bank reduces interest rate by 100 basis points to 8.75%

The Turkish Central Bank, in today’s monetary policy committee meeting, has reduced its one-week repo policy rate by 100 basis points from 9.75% to 8.75%. The cut was double the rate expected by economists.


This decision follows the rate cut of 425 basis points on 25.07.2019 from 24% to 19.75%, the rate cut of 325 basis points on 12.09.2019 from 19.75% to 16.50%, the rate cut of 250 basis points on 24.10.2019 from 16.50% to 14%, the rate cut of 200 basis points on 12.12.2019 from 14% to 12%, the rate cut of 75 basis points on 16.01.2020 from 12% to 11.25%, the rate cut of 50 basis points on 19.02.2020 from 11.25% to 10.75%, and the rate cut of 100 basis points to 9.75% on 17.03.2020.


In addition to the interest rate cut, the Bank has also recently announced a series of measures aimed at containing the economic fallout from the coronavirus pandemic. The continuing rate cuts and other expansionary policies of the Turkish government have only added to the pressure on the Turkish lira, which is now close to TL 7 to the US dollar and has thereby devalued by 6.5% since the beginning of April.


The interest rate cuts since July 2019 have been part of the Turkish government’s determination to boost growth, lift Turkey's economy from recession, and help reduce Turkey's high unemployment rate, at the risk of creating imbalances in the economy. The Turkish Central Bank’s further interest rate cut today however moreover shows the government’s  concern over the serious contraction in the economy caused by the coronavirus pandemic. The new policy rate of 8.75% is now some 63.5% lower than it was 9 months ago, and is 3.1 percentage points below the March 2020 official annual inflation rate of 11.86%. Turkey’s real rate is now among the lowest in the world. The Turkish Central Bank no doubt justifies this cut due to the recent crash in world oil prices which will reduce Turkey’s inflation figures and improve its current account balance. The Bank is prepared to take the risk of a run on the Turkish lira in order to avoid a slowdown in the economy.


The Turkish Central bank gave the following press release on its website relating to its interest rate cut decision:


“The Monetary Policy Committee (the Committee) has decided to reduce the policy rate (one-week repo auction rate) from 9.75 percent to 8.75 percent.


As developments regarding the spread of the coronavirus substantially weaken global growth outlook, central banks in advanced and emerging economies continue to take expansionary measures. The pandemic disease is closely monitored for its evolving global impact on capital flows, financial conditions, international trade and commodity prices.


Having displayed a strong upward trend in January and February, thanks to the improvement in financial conditions, economic activity has started to weaken in mid-March due to the effects of the coronavirus pandemic on external trade, tourism and domestic demand. In order to contain negative effects of the pandemic on the Turkish economy, it is of crucial importance to ensure the healthy functioning of financial markets, the credit channel and firms’ cash flows. In this respect, recent monetary and fiscal measures will contribute to financial stability and post-pandemic recovery by supporting the potential output of the economy. Current account balance, which recently recorded significant improvement, is expected to follow a moderate course throughout the year due to the restraining effects of commodity prices and imports.


Developments in inflation expectations, domestic demand conditions and producer prices have contributed to a mild trend in core inflation indicators. Despite the recent depreciation in the Turkish lira due to global developments, continued sharp decline in international commodity prices, especially crude oil and metal prices, affects inflation outlook favourably. While the rise in unit costs resulting from declining production and sales is closely monitored, the disinflationary effects of aggregate demand conditions are estimated to have increased. In this respect, it is considered that risks on the year-end inflation projection are on the downside. Accordingly, the Committee decided to make a 100 basis point cut in the policy rate.


The Committee assesses that maintaining a sustained disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, monetary stance will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.”


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