Turkey central bank set to cut rates to 8.25 percent, but may surprise

Turkey’s central bank is set to cut interest rates for the ninth-consecutive occasion, seeking to lower borrowing costs for an economy reeling from the financial impact of COVID-19.

The central bank in Ankara will probably lower rates by 50 basis points, or 0.5 percentage points, to 8.25 percent at a meeting of its Monetary Policy Committee on Thursday, according to polls of economists published this week by Reuters and the state-run Anadolu news agency.

Monetary policymakers in Turkey have slashed rates to 8.75 percent – below annual inflation of 10.9 percent – from 24 percent last July, when President Recep Tayyip Erdoğan sacked and replaced the bank’s governor for failing to support his pro-growth economic policies. The International Monetary Fund predicts that Turkey’s economy may contract by 5 percent this year.

Economists were divided somewhat about how much the bank would lower its benchmark one-week lending rate, the polls showed. Predictions ranged from a 25-basis point cut to a 100-basis point reduction. The bank has surprised with larger than expected reductions at almost every meeting over the past year.

Recent strength in the lira, backed by decisions by the banking regulator and rate cuts by other central banks, could encourage policymakers to lower them by 75 basis points, Muhammet Mercan, chief economist for ING Bank in Turkey, said in a report.

Mercan also referred to the central bank’s quarterly inflation report published last month, in which it lowered its prediction for year-end inflation to 7.4 percent from 8.2 percent. Still, he said the impact of a weaker lira points to another challenging year, with ING expecting the rate to fall to 8.3 percent by December.

The central bank has already pulled down the effective cost of funding for the nation’s banks to 8.2 percent by holding regular auctions of repurchasing agreements, or repo, at lower rates of interest than the benchmark. That could allow the central bank to keep the benchmark on hold while still carrying out cheaper lending.