Big Rate Cut Is Next in Turkey’s Sights After Quake: Day Guide

Beril Akman
·4 min read
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(Bloomberg) --

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Turkey may cut interest rates to the lowest in seven years, adding a missing piece to its emergency response after the country’s worst earthquake disaster in a century.

The government has already earmarked 100 billion liras ($5.3 billion) in relief spending, alongside handouts to families in the affected regions. The effort also included a costly market intervention and promises of a rebuilding blitz across areas in the southeast that were rocked by a series of deadly tremors earlier this month.

The central bank is set to follow on Thursday with a rate cut that some analysts — including Bloomberg Economics — predict will push the benchmark below 8% for the first time since 2016. Most economists surveyed by Bloomberg expect a decrease by a full percentage point to 8%.

With critical elections slated for May, the Monetary Policy Committee was tilting dovish even before the twin quakes on Feb. 6 jolted provinces that account for about a 10th of Turkey’s economic output.

The disaster that’s killed over 42,000 people in Turkey and destroyed thousands of buildings has only added urgency for the central bank to deliver a dollop of monetary stimulus despite rates already being almost 50% below zero when adjusted for inflation.

Ibrahim Aksoy, chief economist of HSBC Asset Management Turkey, now expects a rate cut bigger than the 100 basis-point move seen before the disaster “because of the negative effects of the earthquake on economic activity.”

Coming off the worst inflation crisis since 1998, the economy is in for a new shock that threatens growth and will strain a budget that ended last year with its smallest deficit in more than a decade. The disaster is also changing the political calculus for President Recep Tayyip Erdogan by opening him up to accusations from the opposition over the government’s handling of the relief effort.

What Bloomberg Economics Says...

“Given the high and still rising humanitarian and economic toll of the disaster, we see the central bank front-loading the majority of the total rate cut to February and executing the remainder closer to the vote. Alternative tools are likely to be employed between these two actions. The rate cut will likely increase the pressure on the lira, which will curtail the expected deceleration in price gains.”

— Selva Bahar Baziki, economist. Click here to read more.

In the belief that lower rates can cool off inflation, Erdogan has been bent on pushing borrowing costs ever lower even after 500 basis points of monetary easing last year. And in January, the central bank removed a phrase on current rates being at an “adequate” level, a sign interpreted by some economists that deeper cuts were ahead.

An ever-more expansionary monetary policy will do nothing to offset risks to inflation that just slowed to less than 60% on an annual basis for the first time in almost a year. It may come under pressure after the earthquakes, with fiscal stimulus and the threat to the supply of food products such as meat prompting JPMorgan Chase & Co. to raise its year-end estimate to 45% from 43%.

The approach could also draw the lira deeper into danger after months of relative stability, thanks largely to fringe measures and interventions by the central bank that Bloomberg Economists estimates cost $108 billion last year.

Standard Chartered Plc has warned the Turkish currency could weaken to 36 per US dollar — from just under 19 — should the current ultra-loose policies continue after elections. The lira is down 0.9% so far this year after losing nearly 29% versus the US currency in 2022.

But it’s the scale of the devastation that will likely set the tone for policymakers, with the disaster’s total costs seen at as much at $84 billion. To ease the burden for lenders, the central bank has already introduced a range of waivers including exemptions on reserve requirements for some of the credit in the quake zone.

JPMorgan’s Turkey economist Fatih Akcelik, who expects the central bank to bring its benchmark down by 100 basis points this week, said he does “not rule out more rate cuts ahead of the elections.”

--With assistance from Joel Rinneby.

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