Turkish Central Bank Rate Cut Exceeds Expectations
December 26, 2024
Turkey’s one-week central bank repo rate was reduced to 47.5% from 50.0%. The previous change, a 500-basis point hike in March 2024 had culminated a massive 4100 basis points of tightening begun in June 2023. A released statement from the Central Bank of Turkey‘s monetary policy committee defended the size today’s interest rate cut that exceeded the consensus of analysts that the rate was going to be lowered around 150 basis points. The assertion is made that underlying inflationary pressures seen in month-on-month movements are receding in spite of elevated price expectations. At 47.1% in November, however, CPI inflation is barely below the new interest rate level and down just five basis points over the previous three months versus a retreat of 23.5 percentage points between May and August. A vicious cycle of reinforcing currency depreciation and accelerating domestic inflation had fueled the rise of CPI inflation from 38.2% in mid-2023 to 75.5% eleven months later. Today’s negative reaction of the Turkish lira, which is down over 15% on year, is an ominous sign, even if quite understandable.
At the time of the one-week repo’s final increase in March 2024, officials had also doubled the spread between the overnight lending rate and overnight borrowing rate by lifting the former by much more than the latter. The previous overnight rate spread of 300 basis points was today restored. The borrowing rate was cut 100 basis points to 46%, while the lending rate has been reduced four percentage points to 49%.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Bank of Turkey
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