Turkey Central Bank Cuts Left Interest Rates Unchanged at 9%, Bond Yield Hits Six Year Low

The Central Bank of Turkey left its key one-week repo rate unchanged at 9% in its December meeting on Thursday, as expected, saying the current policy rate is adequate.  The bank had cut key interest rates in November for the fourth consecutive month. There is concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy but the collapsed Lira and soaring inflation perhaps enabled reason to take hold. The TCMB had signaled it will end the rate-cutting cycle. Turkey’s currency, the lira remained soft near a record low, with one U.S. dollar buying 18.6729 lira after the announcement.


Recent opinion polls show Mr. Erdogan losing or in a dead heat with potential challengers in an election scheduled for next year.

Turks can’t afford bare necessities as inflation runs rampant from the collapsed currency. Inflation in Turkey went over 85.5% in October, the highest since 1998, largely due to surging costs of importing energy with an increasingly weak currency.  Independent economists at ENAG, a research group that studies inflation in Turkey, say the actual rate of inflation is likely more than 185%.

The central bank had predicted inflation will reach a high of around 85% this fall, before ending the year near 60%, or 12 times its target.

The decision comes after 1000bps in unorthodox rate cuts since September of 2021 

Turkey Interest rates

Turkey Government 10 Year Bond Yield Hits Six Year Low

After the central bank paused the rate-cut cycle and left the one-week repo rate unchanged at 9% Turkey’s 10-year benchmark government bond yield continued to fall to 9.9% in December, the lowest in over six years, amid high inflation rate, low interest rates and the introduction of restrictive measures.

Turkey Government Bond 10y

Turkish authorities have been introducing rules that force banks to buy government bonds. In mid-October, a mandate was set for lenders with less than half of deposits in lira next year hold an additional seven percentage points of government bonds. This regulation alone created some TRY 88 billion in demand for government bonds, and it could double for those whose lira deposits are between 50-60% of the total deposits, according to bankers.

Lira Trampled Underfoot

The TCMB’s board has in the past signaled that it would continue to mandate measures to stimulate lira usage in Turkey until inflation falls to the 5% level

The Turkish central bank has also spent tens of billions of dollars in foreign currency in interventions to prevent a more severe slide in the lira, economists say.

The Turkish government’s special savings program encourages people to keep their money in lira and introduced a rule that forces exporters to sell 40% of their foreign-currency revenue to the central bank.

Turkey is funding its unusual economic approach in part with an influx of money from Russia. Mr. Erdogan has deepened Turkey’s economic relationship with Russia this year and lately with Saidi Arabia. Turkey is boosting trade and allowing Moscow to turn to Turkey to ease the effect of Western sanctions.

The currency is now worth about 45% of its value at the beginning of the year making imports at least doubly expensive. Turkey’s economy is heavily dependent upon imports for producing goods from basic foods to textiles, so the rise of the dollar against the lira has a direct impact on the price of consumer products.

Turkish Lira Collapse

Business conditions among Turkish manufacturers continue to deteriorate the most since May 2020 after output and new orders suffered their worst performance since the first wave of the coronavirus pandemic. The threat of a recession in Europe, the main destination for Turkish shipments abroad, is a huge concern for an industry that now accounts for 95% of Turkey’s total exports.

The latest current account deficit widened to over 13 fold and the trade deficit tripled from the corresponding period of the previous year, contradicting Erdogan’s pledge that Turkey would consolidate a strong surplus position.

Erdogan has dug his heals in from the widespread criticism and pleas to reverse course on rates. In the past two years he has sacked three central bank presidents and only this week replaced his finance minister. And so, the lira continues to collapse.

Şahap Kavcioğlu, the Turkish central bank governor, supports president Recep Tayyip Erdoğan’s theory that high interest rates cause inflation, while mainstream economists subscribe to the opposite view.

Mr. Erdogan has turned to Russia to bolster the Turkish economy, accelerating trade between the two countries and welcoming inflows of Russian money that have helped Turkey shore up the foreign assets needed to stabilize the lira.

Turkey’s deepening economic ties with Russia have led to Western pressure over concerns that Mr. Erdogan is helping the Russian government and oligarchs evade sanctions imposed in response to the invasion of Ukraine. Two major Turkish banks this week said they dropped the use of Russia’s Mir card after the U.S. sanctioned the head of the payment system, which is an alternative to Visa and Mastercard.


Source: TCMB WSJ

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