Turkish Central Bank

Turkish Central Bank surprises with a drastic drop in interest rates

The Central Bank of Turkey announced by surprise a drop in interest rates of 200 points, from 18% to 16%, despite inflation being around 20%.

Turkish Central Bank (TCMB) surprised this Thursday with a drastic drop in interest rates of up to 200 basis points, double that expected by analysts, just a few days after the entity dismissed several members who – according to some media – would be against the rate cut policy advocated by Turkish President Tayyip Erdoğan.

In a statement issued after the 10th meeting of its Monetary Policy Committee (PPK) this year, the Central Bank announced its decision to cut the one-week benchmark interest rate from 18% to 16%, acknowledging however that until the end of the year there is little room for further cuts due to what he described as a “transitory” pressure on the prices of food, energy and other imports.

The announced rate cut is twice the most daring forecasts of analysts, who had mostly forecast a drop of between 50 and 100 basis points, at the most, while other economists consulted maintained that the Turkish entity would not dare to make new cuts.

The Turkish lira, already hit when a deputy governor of the Turkish Central Bank was removed from office last week, reacted adversely to the announcement, initially losing up to 3% of its value against the dollar, only to partially recover later. The governor of the Central Bank, Şahap Kavcıoğlu, has nevertheless denied the rumours about the reasons behind last week’s dismissals, assuring that there are no internal problems in the entity.

The drastic drop in interest rates announced by the Turkish Central Bank is especially surprising after prices in Turkey broke new records last September, with inflation reaching 19.58%, making it difficult to reach the TCMB’s own inflation forecast for the end of 2021, which remains at 14.1%. However, the entity chaired by Kavcıoğlu maintains that a strict monetary policy with high interest rates limits credit and domestic demand, making it a greater impact than expected on commercial loans and an obstacle to the growth of the economy.