Turkey’s central bankers under pressure to further reduce rates

The Central Bank of Turkey will meet today and is expected to again cut interest rates by 100 basis points to 15.5%.

Turkey’s central bankers have slashed rates by 7.5% since July in a bizarre effort to combat rampant inflation, recorded at 15.01% in September.

The Turkish economy entered a recession last year amid global investor concerns and a sharp fall in consumer demand, contracting by 1.5% in the six months to July. However, while Turkish President Recep Tayyip Erdogan remains fixated on lower borrowing costs, which he believes would curb inflation, Central Bank Governor Murat Uysal has opted to moderate further cuts after “front-loading” monetary easing in July and September.

President Erdogan has said he wants to lower borrowing costs to single digits. While a 100bps rate cut will likely provide a boost to the economy, too drastic a cut would see inflation increase even further.

Sluggish economic growth and higher unemployment will continue to heap pressure on the government, which will push Erdogan to champion further rate cuts. But as the threat of sanctions still looms from the ongoing crisis in Syria, the central bank will likely refrain from lowering interest rates too much, offering the lira at least some support should the fighting in northern Syria resume.

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