The Turkish Central Bank returns to reducing interest rates after two consecutive installations

The Turkish Central Bank cut the interest rate on one-week repo operations (repo) – approved as a benchmark rate of interest – by 50 basis points to 8.5 percent, after two months of fixing it at 9 percent when it ended in late November (November) last easing cycle that the president insisted on. Recep Tayyip Erdogan to cut interest rates to less than 10 percent.
This level is the lowest in 3 years, while it was considered one of the emergency measures in the face of the worst earthquake disaster in a century, which struck the country on February 6.
The Central Bank of Turkey said, in a statement after a meeting of its monetary policy committee headed by Bank President Shihab Kauji Oglu, on Thursday: “The committee believes that the stance of monetary policy after this reduction is sufficient to support the necessary recovery after the earthquake by maintaining price stability and financial stability.”
The statement added, “Although the recently announced data on economic activity were at more positive levels than expected, recession fears persist in the economies of developing countries due to the impact of geopolitical risks and rising interest rates.”
The statement pointed out that although the negative effects of supply restrictions in some sectors, especially in basic foodstuffs, were reduced thanks to the strategic solution tools, producer and consumer price inflation is still high, and the effects of high global inflation on inflation expectations and international financial markets were monitored. Closely.
Official data revealed that the annual inflation rate in Turkey continued to decline for the third month in a row, although it was still at a level higher than expectations. And the Turkish Statistical Institute announced, at the beginning of this month, the inflation figures for the month of January (January), indicating that the annual inflation in consumer prices recorded 57.68 percent, while it was 64.27 percent in December and 84.39 percent in November, after it reached The peak in about a quarter of a century was in October at 85.51%.
President Recep Tayyip Erdogan insists on moving forward with lowering interest rates, in light of preparations for the crucial presidential and parliamentary elections scheduled for May 14th. The MPC was dovish even before the earthquake that hit 10 states in the south and east of the country, which account for about a tenth of the country’s GDP.
The disaster, which claimed the lives of more than 43,000 citizens and destroyed tens of thousands of buildings, made it more important for the central bank to provide monetary stimulus even though rates are already less than zero by about 50% when adjusted for inflation.
The earthquake disaster constituted a new shock to the Turkish economy, which is going through the worst inflation crisis since 1998, threatening growth by between 1 and 2.5%, according to estimates by international economic institutions, in addition to restricting the budget, which ended last year with the lowest deficit in more than A contract, in addition to that it will change the agenda and calculations of Erdogan, whose government the opposition accuses of failing in relief efforts.
Sticking to his belief that low interest rates lead to lower inflation, Erdogan was determined to lower borrowing costs, even after cutting interest rates by 5% over the past year.
In January, the central bank deleted a phrase indicating that current interest rates are at an “appropriate” level, in a sign that some economists interpreted as a prelude to deeper cuts before the elections.
The Turkish Central Bank pointed out in its statement that the indicators indicated before the earthquake disaster that domestic demand would be more active than external demand in the first quarter of 2023, and the growth trend was on the rise.
He said that the effects of the earthquake on production, consumption, employment and expectations are comprehensively evaluated, explaining that although the earthquake is expected to affect economic activity in the near term, it is not expected to have a permanent impact on the performance of the Turkish economy in the medium term.
The Bank stated that while the share of sustainable components in the composition of growth is increasing, the strong contribution of tourism to the current account balance, which exceeds expectations, continues to spread in all months of the year. In addition, domestic demand, rising energy prices and weak economic activity in key export markets keep risks to the current account balance.
The bank pledged to continue to use all available tools to support the effectiveness of the cash transfer mechanism and to align the entire set of policy tools, especially financing channels, while maintaining the stability of the lira, as well as giving priority to creating appropriate financial conditions in order to reduce the effects of the earthquake disaster, and in line with its main goal of stabilizing Prices, and the emergence of strong indications of a permanent decline in inflation and reaching the target of 5% over the medium term.