Turkey’s Central Bank cuts rates for sixth straight month amid worries

Turkey’s Central Bank cuts rates for sixth straight month amid worries

Turkey’s Central Bank cuts rates for sixth straight month amid worries Turkey’s Central Bank cut borrowing costs for the sixth straight month on Aug. 23, lowering its overnight lending rate by 25 basis points despite high inflation and worries about possible credit rating downgrades, underlining that future monetary policy decisions would be conditional on the inflation outlook.  

As expected, the bank cut the highest of the multiple interest rates it uses to set policy to 8.5 percent. It left its benchmark one-week repo rate unchanged at 7.5 percent. 

Deputy Prime Minister Nurettin Canikli tweeted that the 25-point cut in the rates showed the improvement in economic expectations following the bank’s decisions. 

“The Central Bank keeps taking rational decisions,” he added. 

Credit agency Fitch lowered its outlook on Turkey to negative from stable last week following the July 15 failed coup attempt, while Moody’s said on July 18 it was putting its Turkey rating under review for a possible downgrade to junk status.

“The prospects for significant structural reform that would shift the structure of growth from private consumption have diminished,” Fitch said in its statement, as reported by Reuters, emphasizing some pressure over the Central Bank and lenders to cut rates. 

“The Central Bank and commercial banks are facing renewed political pressure on interest rates,” it added. 

Adverse impact of coup attempt reversed

The failed coup attempt and its aftermath increased uncertainty for investors regarding the Turkish economy, prompting the Central Bank to shortly after announce a series of measures to offset the negative effects over the economy. 

“The adverse impact of domestic developments in mid-July on market indicators has been largely reversed due to improved global risk appetite and the recent measures,” the bank said in a statement.

“Moreover, the tight monetary policy stance, the cautious macro-prudential policies and the effective use of the policy instruments laid out in the road map published in August 2015 have increased the resilience of the economy against shocks. Also, considering its contribution to the effectiveness of monetary policy, the [Central Bank] committee decided to take a measured and cautious step towards simplification,” it added. 

It noted that future monetary policy decisions will be conditional on the inflation outlook. 

“Taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained,” said the bank. 

“The committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly,” emphasized the bank.