Turkey cuts rates aggressively putting lira under more pressure

Turkey cuts rates aggressively putting lira under more pressure

ISTANBUL,. Turkey’s central bank cut interest rates to 8.75 percent on Wednesday, risking further lira weakness, in a bigger-than-expected move aimed at limiting the economic damage of the coronavirus crisis.

While the central bank acknowledged the depreciating currency, which has tumbled 15 percent this year, it stressed the need to keep credit flowing and to respond to sliding oil prices as it once again cut interest rates by 100 basis points.

Marking its eighth straight rate cut, Turkey’s central bank lowered its benchmark one-week repo rate from 9.75%, extending an aggressive easing cycle that has seen it fall 1,525 basis points in less than a year, beyond most analyst forecasts.

The median expectation was for a cut of 50 basis points in a Reuters poll of 18 economists, with predictions ranging between no change and a 100 basis point cut.

The rate cut showed that the bank’s “overriding objective is to support economic growth and it is willing to make sacrifices on the Turkish lira, as well as on financial stability and price stability considerations,” said Phoenix Kalen, of Societe Generale.

The lira hit its weakest level since August 2018 — at the peak of Turkey’s currency crisis — touching 6.999 to the dollar, or around 0.25 percent weaker on the day.

While a weaker lira lifts inflation in import-dependent Turkey, the currency has outperformed most emerging markets this year.

Turkey, the largest economy in the Middle East, is tilting into its second recession in less than two years after a surge in cases of the coronavirus.

FASTFACT
25%
Turkish inflation hit a 15-year high above 25 percent in 2018.

The bank’s policy committee said in a statement that fallout from the coronavirus outbreak has started to hit trade, tourism and domestic demand so it was “crucial” to ensure markets are functioning and credit is flowing.

Falling global energy prices are lowering inflation expectations in Turkey, which is almost completely dependent on imports to meet its energy needs, it added.

The bank added that inflation would probably fall short of its year-end forecast of 8.2 percent.

Inflation hit a 15-year high above 25 percent during the 2018 crisis. It has since declined and stood at 11.86 percent in March, well above the policy rate, meaning lira depositors face a negative rate of return.

Turkish authorities had exhausted room for monetary easing provided by the disinflationary impact from oil, Kalen said.

“Turkey finds itself again in a bind from deeply negative real policy rates, depleted net reserves, and short-term external debt obligations amounting to $122 billion,” she said.

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