Turkey’s central bank cut its key interest rate by 50 basis points to 8.5 percent on Thursday, in a bid to support the economy that has been devastated by the most severe earthquake in decades.
“The Committee assessed that the current monetary policy stance after the measured reduction is adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability,” the Central Bank of the Republic of Turkey, or CBRT, said in a statement.
The bank stressed that it has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake.
In January, the Monetary Policy Committee, led by Governor Sahap Kavcioglu, had left the rate unchanged at 9.00 percent for a second straight month after inflation slowed notably from near 85 percent to a nine-month low of 64 percent.
The bank has lowered the policy rate by a cumulative 550 basis points since last August.
The earthquake is expected to affect economic activity in the near term, but it is anticipated that it will not have a permanent impact on performance of the Turkish economy in the medium term, the bank said. The bank also pointed out the sustained improvement in the underlying inflation.
Policymakers will prioritize the creation of supportive financial conditions in order to minimize the effects of the disaster and support the necessary recovery, the central bank added.
The effects of the earthquake, especially that of supply-demand imbalances on inflation, in the first half of 2023 will be closely monitored.
The central bank reaffirmed that it will continue to use all available instruments decisively until strong indicators point to a permanent fall in inflation, and the medium-term 5 percent target is achieved in pursuit of the primary objective of price stability.
Capital Economics is looking for another 50 basis points cut in March despite the limited scope the central bank has to ease further given the already-distorted policy settings and the large external risks.
“The relatively small 50bp rate cut highlights the limited policy space the CBRT has available,” Capital Economics economist Liam Peach said.
“Even so, another rate cut seems likely as President Erdogan applies pressure on the central bank ahead of the election in May.”
The election may be pushed back in the backdrop of the earthquake.
The prospect of further easing in the policy stance amid high inflation could hurt the lira, which has remained relatively stable in the recent months, the economist noted.
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