Turkey set to cut interest rates despite lira’s declines

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Turkey’s central bank is poised to reduce interest rates at a meeting on Wednesday even after the lira traded at its weakest levels since a currency crisis in August 2018.

The central bank is expected to lower its benchmark one-week lending rate to 9.25 percent from 9.75 percent at the Monetary Policy Committee meeting, Reuters reported this week, citing a poll of economists. Dünya newspaper, Turkey’s leading financial daily, predicted a 25-50 basis point cut.

The central bank’s dovish stance on interest rates looked set to continue after data on Wednesday showed consumer confidence slumping to the lowest level since records began in December 2003.

The benchmark index of confidence among Turkish households fell to 54.9 points in April from 58.2 in March. The index stood at 73.1 points in July 2018. Any reading below 100 points reflects pessimism.

Turkey’s central bank has worked with the government to stimulate economic growth since the 2018 crisis erupted. The bank has slashed interest rates from 24 percent last July, when President Recep Tayyip Erdoğan sacked and replaced its governor.

The central bank has surprised investors with larger rate cuts than expected at most meetings since Governor Murat Uysal took up his position.

The lira was little changed at 6.978 per dollar on Wednesday morning after weakening just beyond 7 per dollar on Tuesday. The lira had touched an all-time low of 7.23 per dollar in August 2018, but then remained stronger than the levels it now trades at.

The central bank brought forward its last monthly meeting on interest rates after Turkey announced the first case of the coronavirus on March 11. It cut rates by 100 basis points to 9.75 percent. That brought borrowing costs for banks into negative territory, when taking account of consumer price inflation of 11.9 percent.

Turkey’s economic downturn is set to persist as the spread of the coronavirus hits output. This week, Erdoğan announced a four-day lockdown of the population and businesses from Thursday. Only companies involved in activities such as infrastructure and logistics are permitted to remain open.

Meanwhile, the international reserves of the central bank, minus its liabilities, are close to zero after it partnered up with state-run banks to bolster the lira’s value in recent months. That means the bank has few defences, barring capital controls, should people continue to sell the currency.

Ahval

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