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Turkish central bank cut rates to cushion earthquake impact

Tie, Accessories, Accessory REUTERS/Marko Djurica
Erdogan said he is determined to lower inflation, which dropped to just below 40% in May, to single digits

Turkey’s central bank cut its main interest rate to 8.5 percent from nine percent on Thursday, moving to cushion the economic impact of a devastating earthquake that killed more than 43,000 people in country’s south on February 6.

The cut was expected following the disaster, though some economists had predicted a considerably bigger reduction.

“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 central bank said in a statement.

It also said after its monthly monetary policy committee meeting that it will closely monitor earthquake-driven supply and demand imbalances and their impact on inflation, while mainly stressing the importance of supporting growth and jobs.

The decision had little impact on the lira, which traded at 18.8755, barely changed from its early levels. The currency has touched record lows against the dollar in recent weeks, but its moves have been far smaller since the summer due to state control of the currency market.

Even before the quakes, analysts said there could be more easing ahead of presidential and parliamentary elections due by June 18 and expected on May 14, and in which President Tayyip Erdogan is set to face the biggest political challenge of his two-decade rule.

The central bank kept rates steady at nine percent in December and January but has now cut them by 1,050 basis points since late 2021.

A 500-basis points (bps) run of easing last year and subsequent slump in the lira contributed to inflation soaring above 85 percent. It dropped to a still-high 58 percent in January.

Erdogan has urged monetary stimulus over the last several years, aiming to achieve price stability by slashing borrowing costs, boosting exports and flipping chronic current account deficits to surpluses.

A previous flurry of rate cuts sparked a late-2021 currency crash. The lira lost 44 percent versus the dollar that year and a further 30 percent in 2022, stoking inflation.

In a Reuters poll of 17 economists, the median forecast was for a 50-bps cut to minimise the economic hit from the earthquake. But while nine had expected, in some cases of up to 200 basis points, eight institutions had forecast no change.

Istanbul-based economist Enver Erkan predicted more cuts could follow.

“The base effect in inflation creates a confidence interval from the CBRT (central bank’s) perspective, so before the election, there may be a rate cut again.”

Business groups and economists have said the earthquake could cost Ankara up to $100 billion to rebuild housing and infrastructure, while shaving one to two percentage points off economic growth this year.