Issued by CEMO Center - Paris
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Turkey cuts interest rates to boost earthquake-hit economy ahead of elections

Friday 24/February/2023 - 03:32 PM
The Reference
Dina Khalaf

Turkey’s central bank has cut its main interest rate by 0.5 percentage points to 8.5%, marking the latest in a series of big interest rate reductions ahead of this year’s election. The decision was made in an effort to support the economy after the devastating earthquake that hit the country earlier this month. The earthquake killed more than 47,000 people, toppled thousands of buildings and upended the lives of millions more.

President Recep Tayyip Erdoğan, who has a significant influence on central bank decision-making, has taken measures to bolster the economy and help those affected by the disaster. On Wednesday, the government banned businesses from dismissing workers for three months in the 10 affected provinces, and laid out plans to provide affected businesses with help paying employees’ wages.

Despite concerns from economists that fresh cuts to borrowing costs could worsen Turkey’s already severe problem with soaring prices, the central bank has said that the latest interest rate reduction was made in part to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake.

The central bank has also cited international recession risks and indications that cost pressures across the Turkish economy are easing as reasons for the interest rate cut. The move has been expected by economists, who were polled by Refinitiv ahead of the decision.

However, analysts have criticised Erdoğan’s government for its initial reaction to the earthquake and over a building amnesty programme that they say worsened the scale of the disaster. The quake struck as the Turkish president was waging the toughest election campaign of his two decades in power. He had previously signalled that elections would be held on May 14, but some analysts expect him to push it back.

The lira was little changed after the interest rate decision, trading near an all-time low of TL18.87 against the US dollar. It has fallen 27% over the past 12 months due to high inflation and low interest rates. The government has implemented measures to encourage businesses and individuals to hold more lira, and interventions by the central bank have helped keep the currency from sliding further.

The central bank has also put in place a broad set of other measures that affect the borrowing costs and deposit rates for individuals and businesses. Many economists believe that these measures have reduced the overall effect of changes in interest rates. Enver Erkan, an independent economist, has said that the central bank’s confidence in further pre-election rate cuts could be boosted by the falling inflation rate, which he believes is a result of very high prices in the previous year’s period, known as the “base effect”.