Turkey central bank halts easing cycle after rate cut to 9%

NurPhoto/Diego Cupolo

• President Erdogan called for single-digit interest rate by year-end
• Central bank slashed rates by 500 basis points since August
• Bank says easing necessary to support economic activity

Turkey’s central bank cut its policy rate by 150 basis points to nine percent as expected on Thursday and said it decided to halt its easing cycle, in line with President Tayyip Erdogan’s call for a single-digit rate by year-end despite inflation above 85 percent.

The lira weakened to a record low of 18.66 to the dollar after the move and stood at 18.63 at 11:07 GMT.

Thursday’s cut brings the cumulative easing in four months to 500 basis points. The central bank repeated the stimulus is necessary given signs of economic slowdown, even as central banks around the world race in the other direction.

“It is critically important that financial conditions remain supportive… in a period of increasing uncertainties regarding global growth as well as further escalation of geopolitical risks,” the bank’s policy committee said.

“Considering the increasing risks regarding global demand, the Committee evaluated that the current policy rate is adequate and decided to end the rate cut cycle that started in August.”

Inflation has surged since autumn 2021, stoked by an unorthodox easing cycle, sought by Erdogan, that sparked a currency crisis late last year. He said last month the bank would continue rate cuts every month “as long as I am in power.”

Erdogan, a self-described “enemy” of interest rates, aims to boost investments, production, exports and employment while lowering rates under his economic programme.

Policy Path

Liam Peach, senior emerging markets economist at Capital Economics, said there is still a risk of further cuts in coming months.

“After all, growth will continue to slow, inflation will fall sharply from December once the effects of last year’s currency crisis fall out of the annual price comparison,” he said in a note.

“We suspect president Erdogan will maintain pressure on the (bank) for looser policy ahead of next year’s election,” Peach added of the presidential and parliamentary vote that polls show is tight.

Six of seven economists polled by Reuters expected a pivot in 2023 to tightening that would bring the policy rate to a range of 16 percent and 35 percent by the end of next year.

Analysts say policy will likely remain steady until the election in May or June, after which it will depend on whether Erdogan is re-elected. The opposition has promised a return to orthodoxy and rate hikes.

The central bank expects inflation to drop to 65.2 percent by end-2022, thanks largely to base effects in December, compared to a median estimate of 70.25 percent in the latest Reuters poll.

Governor Sahap Kavcioglu has said two prerequisites for price stability were achieving a lasting current account surplus and the dominance of the lira in households, firms and banks’ balance sheets.

Erdogan’s programme aims to turn Turkey’s chronic current account deficits to a surplus but Ankara does not see a surplus in its economic projections that go up to 2025.