Turkish Central Bank Cuts İnterest Rate

yyyThe benchmark repo rate was cut to 7.5 per cent, down from 7.75 per cent and in line with economists’ expectations, reports Daniel Dombey.

The overnight lending rate was lowered somewhat more than expected, to 10.75 per cent, while the overnight borrowing rate was trimmed less than forecast, to 7.25 per cent.

While the cuts – particularly to the overnight rate – were in line with demands by President Recep Tayyip Erdogan, whose AK party faces general elections on June 7, it was far from clear whether they would satisfy him.

Ahmet Davutoglu, Turkey’s prime minister, immediately labelled the bank’s move as insufficient:

This rate cut is not enough. It is important that rates have a declining trend… We expected more.

President Erdogan and his allies has continually heaped pressure on the central bank to cut its interest rates this year.

A January cut proved insufficient, leading the central bank to call for an extraordinary meeting to do more, but its plans were scuppered by a rout in the Turkish lira, with investors increasingly concerned over the independence of the central bank.

Some analysts argue that a temporary fall in inflation – due in part to the global oil price plunge – gives the country has scope for limited interest rate cuts, but that the bank’s forward guidance and political reaction to its move was of particular importance.

“We have been counting on the central bank to save our arses and doing the right thing when the time comes and now we are less confident that it is capable of doing so,” said Refet Gurkaynak, an economist at Bilkent university in Ankara, referring to pressure from the government.

Monetary policy in the country has been particularly highly charged in recent weeks. President Recep Tayyip Erdogan has rounded on the bank both for what he says is excessively high rates and for falls in the value of the Turkish lira against the dollar. The president insists, in defiance of economic theory, that high interest rates cause inflation.

In a statement that implied that the bank did not see itself as in the midst of a drive to cut interest rates steeply: the bank said:

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