Turkey’s Next Monetary Move – Rate Pause on the Horizon

Following the greatest earthquake calamity to hit the nation in decades, Turkey’s central bank unexpectedly reduced interest rates by a smaller amount than expected. Thus, it indicates that additional monetary easing is no longer conceivable.

The Monetary Policy Committee (MPC), under the direction of Governor Sahap Kavcioglu, reduced the one-week repo rate from 9% to 8.5%. This is the lowest level in three years after a two-month hiatus. Bloomberg polled economists, and most of them anticipated a drop of one whole percentage point. After the decision, the Turkish lira started to decline marginally.

According to a statement released by the MPC on Thursday, rates are now “sufficient to facilitate the essential recovery in the aftermath of the earthquake.” About a month ago, it stopped using the word “sufficient” when describing rates.

Turkey’s dovish monetary policy faces new test after devastating earthquakes

The twin earthquakes on February 6 rattled the provinces that provide about a tenth of Turkey’s economic output. But even before, the MPC was leaning dovish in anticipation of the crucial elections scheduled for May. President Recep Tayyip Erdogan wants to lower borrowing costs even more after last year’s 500-point monetary easing. This happened in the hope that lower rates would reduce inflation.

Despite interest rates already being over 50% below zero when adjusted for inflation, the calamity that has killed over 43,000 people and wrecked thousands of buildings in Turkey has only increased the urgency for the central bank to give further monetary stimulus.

The economy is about to undergo another shock that will threaten growth and put a strain on the budget. Last year, the country’s deficit was the smallest in ten years. It came after the economy went through its worst inflation crisis since 1998. The crisis also affects Erdogan’s political calculations. It makes him more vulnerable to criticism about how the government handled the opposition’s recovery efforts. An increasing monetary policy has the dangers of inflation, not lessening them. Moreover, inflation has recently dropped to less than 60% on an annual basis for the first time in almost a year. JPMorgan Bank & Co may experience pressure following the earthquakes due to the government’s fiscal stimulus. In addition, potential danger to the supply of necessary food like meat is no less of a hustle.