NAfter breathtaking interest rate cuts from 24 to 8.25 percent within the last nine months, the Turkish central bank has left the most important interest rate for one-week buy-back agreements constant until further notice. Market observers had previously expected the repo auction rate to drop again by 0.25 points to 8 percent. In the past few months, the central bank’s executive board had exceeded expectations of a key rate cut several times. Central Bank President Murat Uysal, who was appointed by President Recep Tayyip Erdogan last summer, justified the step with the economic recovery to be observed, even if the risks from the corona pandemic are still high.
Given the already negative real interest rates, the decision of the currency keepers is completely rational, the agency Bloomberg quoted the analyst Piotr Matys from Rabobank in London. The decisive question is now “whether this is a pause or the end of the rate cuts”. Erdogan wants to boost domestic consumption with low interest rates, a procedure that is controversial among economists.
Rise in core inflation
Monetary and fiscal measures – Turkey had raised taxes on imported goods several times – contributed to the financial stability and recovery of economic activity by supporting the economic potential of the economy, the central bank said. Although there has been a recent drop in income from exports and low-lying tourism, at least in exports, normalization is expected soon, which will help to reduce the current account deficit. There is also an increase in core inflation, especially in food. Against the background, it was decided to keep the key interest rate constant.
After a brief slump, the Turkish lira was largely unchanged on the currency markets at 6.85 lira per dollar. At the beginning of May, the local currency had been weaker than ever at 7.23 lira per dollar. Since then the course has recovered. Interventions by the state, the global recovery of the emerging markets and cooperation agreements with other central banks are cited as the reason for this. The telecommunications company Turk Telekom announced last week that it had settled business with China in Chinese yuan for the first time. The basis for this is a swap agreement between the Turkish and Chinese central banks.
Turkey is heavily indebted in dollars and euros. According to the central bank, long-term liabilities of the private sector amounted to $ 173.6 billion at the end of April, which was $ 7.4 billion less than at the end of 2019. Almost two thirds of this is in dollars, one third in euros. Devaluations of the lira are directly reflected in higher expenses for the repayment of interest and debts.