Central banks around the world are trying to support the economy and Turkey’s central bank is not an exception. The country’s central bank decided made to the decision to reduce interest rates by 50 basis points on May 21. The confidence in the local currency lira encouraged this move. Interestingly, the lira strengthened modestly after hitting record lows earlier in May.
Importantly, following this decision the one-week repo rate, from 8.75% to 8.25%. Moreover, it was the ninth-straight rate cut. This move comes at a time when Turkey’s foreign reserves shrank due to the ongoing situation.
It is worth mentioning that the rate cut is the latest in a long easing cycle that dates back to 2019 more precisely in July. At that time, the bank’s interest rate was 24%.
According to the central bank’s monetary policy committee, the local economy may have bottomed out earlier this month due to the pressure of the coronavirus pandemic. Unfortunately, the number of confirmed cases surpassed 152,000. Moreover, the country has the highest number of cases in the Middle East region. Turkey surpassed its neighbor Iran in mid-April.
The economy of Turkey
Notably, the local economy was struggling to cope with problems even before the coronavirus pandemic. Its currency started to decline two years ago. Let’s not forget about a high fiscal deficit and unemployment. As of January, the unemployment rate was close to 14%.
In March 2020, the country’s government unveiled a $15.5 billion stimulus plan to aid businesses affected by the pandemic. The purpose of this plan is to help companies that suffered the biggest losses due to the coronavirus pandemic.
Moreover, the tourism sector is under huge pressure due to the ongoing situation. It is not surprising that the country’s government wants to help the tourism sector.
In recent months, the Turkish central bank spent millions of dollars from its foreign currency reserves to boost the local currency. Thanks to this move, it was possible to lower borrowing costs which the government hopes will help the process of economic recovery. As a reminder, borrowing costs when adjusted for inflation are already below zero.
Moreover, inflation in April was 10.94%. Interestingly, inflation fell to the lowest level since November. Also, the Turkish central bank lowered its year-end inflation projection from 8.2% to 7.4%.
Furthermore, the country’s central bank reached an agreement with Qatar. As a result, Turkey tripled its currency swap agreement with Qatar. This is very important for the country as it needs money to tackle a widening fiscal deficit as well as a potential full-year recession.
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