Turkey Central Bank Leaves Rates Unchanged as Lira Hits New Lows

The Central Bank of Turkey held its key one-week repo rate at 8.5% in its March 2023 meeting, as expected following a 50-bps cut in the previous month in response to the country’s earthquake disaster. The Committee assessed that the current monetary policy stance is adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability. The Turkish lira held a record low over 19 per USD after the announcement. Since September 2021 there has been concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy, despite a collapsed Lira and soaring inflation.

The TCMB prior to the earthquake 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 18.80 lira after the announcement.


The CBRT will continue to use all available instruments decisively until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved in pursuit of the primary objective of price stability.

The CBRT will implement Liraization Strategy in order to create an institutional basis for permanent and sustainable price stability.

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 was 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. Now surveys by the central bank point to inflation expectations of 37.5% for the year ahead and 20.8% for 2024. (We are not sure what that is based on)

Annual inflation eased back to 55% in February, as the lira plunged by 56% since the start of the bank’s cutting cycle and compounded surging energy costs that Turkey must import. The TCMB also extended anti-dollarization strategies to support the currency. as the weak currency exacerbated the soaring prices of international energy that Turkey must import.

The latest current account and goods trade deficits have widened sharply, no surprise but contradicting Erdogan’s pledge that Turkey would consolidate a strong surplus position.

The decision comes after 1050bps in unorthodox rate cuts since September of 2021 

Turkey Interest rates

Turkey Government 10 Year Bond Yield Rises to Four Month High

The yield on Turkey’s 10-year government bond rose above 12.0% in late March, the highest since November, as investors weighed on the Turkish central bank’s decision to hold its key interest rate unchanged at 8.5%. Bond yields have extended their rise since the beginning of the year amid abundant debt supply as the country increased borrowing to recover from the catastrophe and stimulate growth.

Benchmark bond prices were also pressured by investors’ preference for dollar-denominated debt in the country due to the lira’s weakness. On March 9th, Turkey raised $2.25 billion in dollar-denominated debt in its first bond deal on foreign markets since January, as the government started the country’s rebuild, estimated at $100 billion.

Restrictive measures have been introduced to support the bond market, along with others that were already in place. This included discouraging banks from holding inflation-linked bonds as collateral for funding from the central bank and the encouragement of lenders to buy longer-term government bonds. The central bank of Turkey when it broke its rate-cut pause and lowered the key interest rate by 50bps to 8.5% loosened financial conditions in response to the country’s earthquake disaster.

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 42% 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.

Turkey posted a current account deficit of USD 5.9 billion in December 2022, compared to a deficit of USD 3.2 billion in the corresponding period of the previous year, and above market expectations of USD 5.5 billion gap.

It marked the fourteenth consecutive month of current account deficits, as goods account deficit rose to USD 8.09 billion from USD 5.05 billion in the previous year, while the services account surplus increased to USD 2.5 billion from USD 2.3 billion, due to travel item which recorded a net inflow of USD 1.5 billion.

On the other hand, the primary income gap narrowed to USD 0.53 billion from USD 0.55 billion, while the secondary income surplus rose to USD 0.214 billion from USD 0.112 billion

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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