Turkey central bank cuts interest rates more than expected, lira stable

Turkey’s central bank reduced its benchmark interest rate by 75 basis points, beating most economists’ forecasts and risking a possible sell-off in the lira.

The bank in Ankara lowered the one-week lending rate to 11.25 percent from 12 percent, according to a decision on Thursday. The main interest rate in Turkey, minus inflation of 11.8 percent, is now negative, rendering lira-denominated assets less attractive.

Turkish monetary policymakers have more than halved the benchmark lending rate from 24 percent since July, when Turkish President Recep Tayyip Erdoğan sacked and replaced its governor for failing to back the government’s pro-economic growth policies. Economists have warned that cutting borrowing costs too fast could lead to fresh volatility for the lira, which is recovering from a currency crisis in 2018.

The lira was up 0.1 percent at 5.86 per dollar after the announcement. State-run banks have been supporting the currency in recent weeks.

In its reasoning for the decision, the central bank cited an improving inflation outlook, weak investment and low global economic activity.  

“The improvement in macroeconomic indicators, inflation in particular, supports the fall in country risk premium and helps contain cost pressures,” the bank said.

Erdoğan said earlier on Thursday that the central bank had a further opportunity to reduce rates at today’s meeting.

Economists were almost evenly divided about whether the central bank would cut rates, polls conducted by Reuters and the state-run Anadolu news agency showed. Those expecting a decrease more commonly predicted a 50-basis point reduction.

Erdoğan maintains that higher interest rates are inflationary, an opinion that contradicts conventional economic theory. Consumer price inflation in Turkey has accelerated from 8.6 percent in October but is less than half the levels it reached in the aftermath of the currency crisis.

Economists predict that inflation may slow to about 9.5 percent in 12 months, according to a central bank survey published earlier this month.