Istanbul February 23 2023: Turkey’s central bank surprised with a smaller interest-rate cut than forecast after the country’s worst earthquake disaster in decades, signaling further monetary easing is now less likely.
After a two-month pause, the Monetary Policy Committee led by Governor Sahap Kavcioglu lowered its one-week repo rate to 8.5% — the lowest in three years — from 9%. Most economists surveyed by Bloomberg expected a full percentage-point reduction. The Turkish lira weakened slightly after the decision.
The MPC said rates are now “adequate to support the necessary recovery in the aftermath of the earthquake,” according to a statement on Thursday. Just last month, it removed the word “adequate” from its guidance in describing rates.
“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 MPC said. It’s also on alert for “the effect of earthquake-driven supply-demand imbalances on inflation.”
With critical elections slated for May, the MPC was tilting dovish even before the twin quakes on Feb. 6 jolted provinces that account for about a 10th of Turkey’s economic output. In the belief that lower rates can cool off inflation, President Recep Tayyip Erdogan has been bent on pushing borrowing costs ever lower even after 500 basis points of monetary easing last year.
The disaster that’s killed over 43,000 people in Turkey and destroyed thousands of buildings has only added urgency for the central bank to deliver more monetary stimulus despite rates already being almost 50% below zero when adjusted for inflation.
“Remarks from President Erdogan are likely to prove crucial in assessing whether today’s lower than expected 50 basis-point cut will be followed by further monetary policy easing ahead of general elections in May,” said Piotr Matys, a senior analyst at In Touch Capital Markets.
Coming off the worst inflation crisis since 1998, the economy is in for a new shock that threatens growth and will strain a budget that ended last year with its smallest deficit in more than a decade. The disaster is also changing the political calculus for Erdogan by opening him up to accusations from the opposition over the government’s handling of the relief effort.