Turkey's Central Bank Slashes Rates Amid Economic Uncertainties

The Central Bank of the Republic of Turkey (CBRT) delivered a sizable rate cut on Thursday, reducing its one-week repo rate to 45% from 47.5%. This move comes as the bank seeks to balance the need for economic growth with the ongoing battle against high inflation. The rate cut follows a similar reduction from 50% last month, marking a new phase of lower rates after a series of rapid hikes in 2023 aimed at combating rampant price increases.



The CBRT's decision to lower interest rates is a reflection of its confidence in the effectiveness of its previous restrictive monetary policy. Inflation has cooled at the end of last year, and the bank believes that its tough medicine has had the desired effect. However, the underlying trend remains in the right direction, and the bank has warned that it will maintain a tight monetary stance until price stability is achieved.

The rate cut, however, comes with significant risks. Turkey's economy is heavily dependent on imports, and a weak currency has fed through into soaring inflation. The CBRT's decision to lower rates once again pushes Turkey's real interest rate even deeper into negative territory, to minus 68%. This could deter local savers and foreign investors from holding lira or lira-denominated assets, heaping further pressure on the currency.

Moreover, Turkey's ballooning external debt burden, with $182bn coming due in the next 12 months, and its wide current account deficit are further sources of demand for foreign currency that could weaken the lira. Analysts have warned that a similar string of rate cuts in the autumn of 2021 set off a cycle of uncontrolled lira depreciation, and the risk remains that the same could happen now.



The CBRT's decision to lower interest rates, given Turkey's economic context, may deter foreign investors, weaken the currency, and increase demand for foreign currency, ultimately making it more challenging for the country to attract and maintain foreign investment. The bank's task is a challenging one, as it seeks to balance the need for economic growth with the need for price stability amid ongoing global economic uncertainties and the Turkish economy's vulnerability to external shocks.

In conclusion, the CBRT's decision to deliver a sizable rate cut is a reflection of its confidence in the effectiveness of its previous restrictive monetary policy. However, the move comes with significant risks, including the potential for uncontrolled lira depreciation and further fueling inflation. The bank's task is to navigate these challenges and maintain a balance between economic growth and price stability in the face of ongoing global economic uncertainties.