Source: Financial Times

After the recent acceleration in inflation, Turkey’s Central Bank reduced its interest rates for the fifth time in a row as part of its efforts to boost growth. The Bank has reduced its one-week repo rate 75 basis points to 11.25 per cent slightly above expectations. With this cut the real interest rate is now close to zero, when inflation is accounted for, diminishing the premium for investors in Turkish assets. The interest rates have fallen by 1,200 basis points since last year.

As reported in Financial Times, the given situation behind the interest cut was that “the inflation returned to double digits in November and quickened again in December to 11.9 per cent. The central bank targets year-end inflation of just over 8 per cent.”

“The course of inflation is considered to be broadly in line with the year-end inflation projection. Accordingly, considering all factors affecting the inflation outlook, the committee decided to make a measured cut in the policy rate,” the central bank said in a statement regarding the cut.

Trajectory of the successive interest rate cuts:

As summarized in Financial Times “President Recep Tayyip Erdogan has pressed policymakers to slash interest rates to drive a credit-fuelled recovery from a recession last year. The slowdown followed a currency crisis in 2018 that slashed almost a third of the value off the lira currency and pushed inflation to a high of 25 per cent. In a show of his influence over the bank, Mr. Erdogan said in a televised speech ahead of the release that rates had fallen in response to his calls to lower them and that the public could expect another “new announcement” on Thursday as rates continue to fall. Mr. Erdogan has vowed to bring the benchmark rate to single digits this year and believes lower interest rates will rein in inflation, contrary to conventional economic theory. In July, he installed a new central bank governor, Murat Uysal, who embarked on an aggressive easing cycle to reduce the rate from a high of 24 per cent, introduced in 2018 to protect the crisis-hit lira. After the announcement, the lira strengthened slightly against the dollar, up 0.1 per cent to TL5.864. Looser monetary policy helped the economy grow 0.9 per cent in the third quarter after contracting in the previous three quarters. The government targets growth of 5 per cent in 2020 and wants cheap loans to expand output. Although the bank has said monetary policy will ensure a “reasonable” rate of return, Mr. Uysal’s rate cuts could make Turkish assets less attractive and may cool investor inflows.”