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Turkey cuts interest rates amid coronavirus crisis in effort to aid recovery

People wear face masks as they walk down the Istiklal avenue on April 14, 2020 in Istanbul a day after Turkish President ordered a fresh lockdown next weekend, warning the move would be imposed as long as necessary to stop the spread of the COVID-19 disease caused by the novel coronavirus.

Ozan KOSE | AFP | Getty Images

Turkey’s central bank cut interest rates by 50 basis points on Thursday, in a move economists say was likely encouraged by confidence in the lira, which has strengthened modestly since hitting record lows earlier this month.

The central bank’s decision to enact its ninth-straight rate cut brings its key rate, the one-week repo rate, from 8.75% to 8.25%. It comes despite investor worries over Turkey’s rapidly shrinking foreign currency reserves.   

The lira was trading at 6.789 to the dollar at 12:30 p.m. London time, little changed from the previous day. Thursday’s rate cut is the latest in a long easing cycle that began when the bank’s interest rate was a whopping 24% in July of 2019.

Turkey’s economy may have bottomed out earlier this month under pressure from the coronavirus pandemic, the bank’s monetary policy committee said in a statement. They described a “pronounced” weakening in April, but said the first two weeks of May had showed signs of “bottoming-out following the steps taken towards partial normalization.”

Turkey has recorded the highest number of coronavirus cases in the Middle East region, with nearly 150,000 cases, having surpassed Iran in mid-April. But its economy was already under pressure before the coronavirus hit, with two years of a weakening currency, a high fiscal deficit and unemployment near 14% in January. The country’s government in late March unveiled a $15.4 billion stimulus plan to aid businesses being hit hard by the pandemic, particularly those in the tourism sector, which is expected to see devastating losses this year. 

The Turkish central bank has drawn down millions of dollars from its foreign currency reserves in recent months in order to prop up the lira, now paving the way for lower borrowing costs which the government hopes will aid economic recovery. Borrowing costs, when adjusted for inflation, are already below zero.

In its announcement, the bank said that keeping the disinflation process in track with the “targeted path” requires “the continuation of a cautious monetary stance,” and that its inflation outlook was “favorable” despite the lira’s depreciation. The dollar has gained 14% on the Turkish currency this year.

Inflation in April was 10.94%, the country’s lowest level since November. The central bank on Thursday lowered its year-end inflation projection from 8.2% to 7.4%, indicating that further rate cuts could be on the horizon.

The news comes a day after Turkey’s central bank tripled its currency swap agreement with Qatar, securing much-needed funding as the country of 82 million burns through its reserves and faces a widening fiscal deficit and potential full-year recession. The move amended an original limit of $5 billion on the two countries’ initial swap agreement in 2018, raising it to $15 billion. 

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