Larger than expected rate cut raises pressure on Turkish lira

Surprising market analysts, Turkey’s central bank lowered interest rates more than expected Wednesday in a measure to bolster cheap credit and moderate the economic impacts of the global coronavirus pandemic.

Announcing the eighth interest rate cut in less than a year, the Monetary Policy Committee led by Turkey’s central bank governor Murat Uysal reduced its one-week repo rate by 100bps to 8.75%, double the cut predicted by economists in a Bloomberg poll.

In a Wednesday statement, the committee said the move was in line with efforts to maintain “a sustained disinflation process” that aims to “lower sovereign risk, lower long-term interest rates” and create a “stronger economic recovery.”

As in other emerging markets, committee members noted the Turkish lira had depreciated amid the pandemic, but said a sharp price decline for commodities such as oil and metal could have positive effects on inflation.

While the rate cut may help open credit lines for Turkish citizens and business in the short term, analysts said the measure could strain state resources and reserves currently propping up the Turkish currency, which hovered near seven liras per dollar Wednesday, its lowest point since August 2018.

Read the full story on Al Monitor.