Turkey cuts interest rates in effort to boost economy following earthquake

Turkey has cut borrowing costs as the central bank sought to support the economy following this month’s devastating earthquake, the latest in a series of big interest rate reductions ahead of this year’s election.

The central bank on Thursday cut its main interest rate by 0.5 percentage points to 8.5 per cent, matching expectations of economists polled by Refinitiv. The benchmark one-week repo rate has been cut from 19 per cent in March 2021 to 9 per cent by the end of last year under pressure from Turkish president Recep Tayyip Erdoğan.

Policymakers said the latest interest rates cut was made in part to dull the economic impact of the February 6 earthquake, which toppled thousands of buildings, killed more than 47,000 people and upended the lives of millions more. “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.

The central bank also cited international recession risks and indications that cost pressures across the Turkish economy are easing as part of its rationale for its decision.

Erdoğan, who exerts a heavy influence on central bank decision-making, has taken a series of measures in a bid to bolster the economy and the finances of those affected by the disaster. The government on Wednesday banned businesses from dismissing workers for three months in the 10 affected provinces, while also laying out plans to provide affected businesses with help paying employees’ wages.

Erdoğan’s government has been criticised for its initial reaction to the earthquake and over a building amnesty programme that analysts say worsened the scale of the disaster. The quake struck as the Turkish president was waging the toughest election campaign of his two decades in power. He had previously signalled that elections would be held on May 14, but some analysts expect him to push it back.

Economists are worried that fresh cuts to borrowing costs could inflame Turkey’s already severe problem with soaring prices. Inflation registered at just under 58 per cent in January, down from a high of 85.5 per cent in October — but still a highly elevated reading.

Enver Erkan, an independent economist, said inflation had been falling because of very high prices in the previous year’s period, which is known as the “base effect”, and that the falls could give the central bank the “confidence” for further pre-election rate cuts. “Monetary and fiscal policy will remain broad until the election,” he said.

The central bank has put in place a broad set of other measures that affect the borrowing costs and deposit rates for individuals and businesses, which many economists say has reduced the overall effect of changes in interest rates.

The lira was little changed after the interest rate decision, trading near an all-time low of TL18.87 against the US dollar. It has fallen 27 per cent over the past 12 months as a result of the high inflation and low interest rates.

Moves by the government to push businesses and individuals to hold more lira, along with interventions by the central bank have helped keep the currency from sliding further.