- Central bank lowered its benchmark to 8.5% from 9% on Thursday
- Policymakers turned more dovish before disaster amid elections
According to Bloomberg article published on February 23, 2023, Türkiye’s central bank surprised with a smaller interest-rate cut than forecast after the country’s worst earthquake disaster in decades, signaling further monetary easing is now less likely.
After a two-month pause, the Monetary Policy Committee led by Governor Sahap Kavcioglu lowered its one-week repo rate to 8.5% — the lowest in three years — from 9%. Most economists surveyed by Bloomberg expected a full percentage-point reduction. The Turkish lira weakened slightly after the decision.
The MPC said rates are now “adequate to support the necessary recovery in the aftermath of the earthquake,” according to a statement on Thursday. Just last month, it removed the word “adequate” from its guidance in describing rates.
“It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake,” the MPC said. It’s also on alert for “the effect of earthquake-driven supply-demand imbalances on inflation.”
With critical elections slated for May, the MPC was tilting dovish even before the twin quakes on Feb. 6 jolted provinces that account for about a 10th of Türkiye’s economic output. In the belief that lower rates can cool off inflation, President Recep Tayyip Erdogan has been bent on pushing borrowing costs ever lower even after 500 basis points of monetary easing last year.
The disaster that’s killed over 43,000 people in Türkiye and destroyed thousands of buildings has only added urgency for the central bank to deliver more monetary stimulus despite rates already being almost 50% below zero when adjusted for inflation.
Waiting for Erdogan
“Remarks from President Erdogan are likely to prove crucial in assessing whether today’s lower than expected 50 basis-point cut will be followed by further monetary policy easing ahead of general elections in May,” said Piotr Matys, a senior analyst at In Touch Capital Markets.
Coming off the worst inflation crisis since 1998, the economy is in for a new shock that threatens growth and will strain a budget that ended last year with its smallest deficit in more than a decade. The disaster is also changing the political calculus for Erdogan by opening him up to accusations from the opposition over the government’s handling of the relief effort.
What Bloomberg Economics Says...
“We don’t think the central bank’s done easing yet. We expect rates to go down further to 7% before the elections this year. We also see the central bank continuing to use alternative tools and currency market interventions to mitigate the backlash of its cuts on the lira. Selva Bahar Baziki, economist.
An ever-more expansionary monetary policy will do nothing to offset risks to inflation that just slowed to less than 60% on an annual basis for the first time in almost a year. It may come under pressure after the earthquakes, with fiscal stimulus and the threat to the supply of food products such as meat prompting JPMorgan Chase & Co. to raise its year-end estimate to 45% from 43%.
The approach could also draw the lira deeper into danger after months of relative stability, thanks largely to fringe measures and interventions by the central bank that Bloomberg Economists estimates cost $108 billion last year.
Standard Chartered Plc has warned the Turkish currency could weaken to 36 per US dollar — from just under 19 — should the current ultra-loose policies continue after elections. The lira is down 0.9% so far this year after losing nearly 29% versus the US currency in 2022.
But it’s the scale of the devastation that will likely set the tone for policymakers, with the disaster’s total costs seen at as much as $84 billion. To ease the burden for lenders, the central bank has already introduced a range of waivers including exemptions on reserve requirements for some of the credit in the quake zone.
JPMorgan’s Türkiye economist Fatih Akcelik, who expected the central bank to bring its benchmark down by 100 basis points this week, said before the decision that he does “not rule out more rate cuts ahead of the elections.”
