Turkey reduces bank rate amid ongoing earthquake recovery efforts

Despite Turkey facing challenges of high inflation and the aftermath of a devastating earthquake, the country’s central bank decided to resume lowering a key interest rate on Thursday.

The Monetary Policy Committee of the bank has announced a reduction in the benchmark policy rate by 0.5 percentage points, bringing it down to 8.5%. This decision comes after the Central Bank of the Republic of Turkey had previously cut the benchmark rate by 5 percentage points, lowering it to 9% between August and November. The rates had remained unchanged since then, making this recent adjustment noteworthy.

Even in the face of soaring inflation at 57.68%, triggering a cost-of-living crisis, the recent cuts have been implemented. This move diverges from the global trend where central banks have been increasing rates to combat inflation in their respective countries.

The magnitude 7.8 earthquake that struck parts of Turkey and Syria on February 6 killed more than 43,500 people in Turkey and destroyed 164,000 buildings. It has been described at the worst disaster the country’s modern history.

The central bank said the quake would not impact Turkey’s economy in the medium term.

“The impact of the earthquake on production, consumption, employment and expectations is being extensively evaluated,” the bank said in a statement. “While the earthquake is expected to affect economic activity in the near term, it is anticipated that it will not have a permanent impact on performance of the Turkish economy in the medium term”.

The rate cuts are in line with President Recep Tayyip Erdogan’s unorthodox economic views that high borrowing costs cause high inflation, even though traditional economic thinking says raising interest rates help tame inflation.

Earlier this month, Erdogan criticised rate increases by central banks around the world, signaling his intention to lower interest rates further.