Turkey slashes interest rates for third month in a row

Turkey’s central bank has slashed interest rates yet again in the third consecutive month of cuts.

Turkey has been seen as a high-potential market, but recent instability there has made its outlook less certain.

Now, the central bank has made yet another dramatic cut to interest rates in a bid to keep the country on its feet, with the third round of interest rate cuts in three months announced on 17 July.

A 50 base-point reduction brought the cost of credit down to 8.25 per cent, nearly one percentage point lower than the nation’s 9.2 per cent inflation rate for the 12 months to June.

Across May and June, the rate had already been cut by 1.25 per cent, though part of that was to reverse an increase in January.

Although the central bank has said that the cut is a response to “improving global liquidity conditions” and falling inflation thanks to a more stable exchange rate, the Financial Times reports that the move came against a backdrop of mounting pressure from the government. In fact, economy minister Nihat Zeybecki told a local news source that current interest rates were “usurious”, preventing the nation from investing, creating jobs and increasing production.

Still, Turkish Prime Minister Tayyip Erdogan has been calling for much more dramatic rate cuts, which the central bank has resisted.

According to Reuters, the prime minister remains convinced that rate cuts are necessary to keep inflation down. Any moves to spur economic growth in the run-up to the election, in which Mr Erdogan is running for the presidency, are also likely to be very welcome.

Yet Turkey remains reliant on foreign finance, which could mean that lowering the cost of borrowing is a risky strategy. It has been argued that there may be little room for manoeuvre when it comes to further cuts, which could mean that Turkey finds it harder to respond to future events.

As Ozgur Altug of BGC Partners wrote and was reported in the Financial Times: “Once a sell-off in the emerging markets starts, Turkey might be the primary candidate to be sold off.”