Turkey’s central bank has cut its benchmark rate for a sixth time in a row, despite growing currency volatility and geopolitical risks.
The bank’s monetary policy committee lowered its one-week repo rate by 50 basis points to 10.75 per cent on Wednesday, bringing the bank closer to achieving President Recep Tayyip Erdogan’s long-stated aim of having single-digit rates in a bid to revive the country’s previous credit-fuelled, fast-paced growth.
The move was smaller than previous rate cuts but pushes real rates — the interest rate minus the inflation rate — deeper into negative territory, diminishing the premium earned by foreign and local investors in return for holding Turkish assets. When annual inflation of 12.15 per cent in January is taken into account, the real rate now stands at -1.4 per cent.
The lira was 0.2 per cent lower against the dollar after Wednesday’s decision, which was in line with the expectations of economists surveyed by Reuters.
Turkey’s central bank has been under pressure from Mr Erdogan, a life-long opponent of high interest rates who has asserted greater control over the bank in recent years.
The Turkish president, who holds the unorthodox economic view that high interest rates cause inflation rather than curbing it, has said many times that he wants interest rates and inflation to fall to single digits this year.
Speaking hours before Wednesday’s decision, Mr Erdogan restated that position, telling an audience of ruling party members: “Our determination to bring down inflation and interest continues.”
He added that he wanted to see a “much higher growth rate” in 2020. Last year the economy suffered a slump in the aftermath of a painful currency crisis. Economists say that a fresh round of credit-fuelled growth risks stoking inflation, reviving its chronic current account deficit and putting fresh pressure on the lira — testing the limits of the authorities’ efforts to control the currency.
The lira has experienced a fresh bout of volatility in recent weeks, caused partly by a stronger dollar but also fuelled by concerns that Turkey is being dragged deeper into the conflict in the Syrian province of Idlib.
Responding to Wednesday’s decision, Goldman Sachs economists Clemens Grafe and Murat Unur said that they expected the central bank to comply with Mr Erdogan’s wish for single-digit rates.
But they expect the bank is likely to cut in smaller increments of 25 basis points at a time in the months ahead, arguing that there is now “much less room for lowering rates” and that lira volatility “remains a key risk”.
They added: “We think that risks are skewed towards larger rate cuts as in our view the authorities continue to prioritise growth.”
Source: Economy - ft.com
