Turkish Central Bank Cuts Interest Rates After Earthquakes

The Turkish central bank cut interest rates in the country by half a percentage point on Thursday. The interest rate hike follows a few weeks after the strong earthquakes in the country, which killed tens of thousands of people and caused enormous damage to buildings and infrastructure.

 

It is also the first interest rate hike since November last year when the central bank announced that it would temporarily stop cutting interest rates.

According to the central bank, the impact of the earthquakes on production, consumption, employment and economic expectations is “extensively evaluated”. While the earthquakes are expected to have short-term impacts on economic activity, the central bank does not expect them to have a lasting impact on the performance of the Turkish economy in the medium term.

Economists and business associations estimate that the reconstruction costs for the Turkish government could be as much as $100 billion. The total death toll from the quakes in Turkey and neighbouring Syria has now reached more than 47,000. In addition, hundreds of thousands of people have been left homeless. This also causes disruptions for companies.

The interest rate in Turkey was cut from 9 percent to 8.5 percent. That was in line with economists’ expectations. This puts interest rates at their lowest level in more than two years. The interest rate steps of the Turkish central bank are controversial because the country is struggling with sky-high inflation. In other countries, interest rates are being raised to curb high inflation.

However, Turkish President Recep Tayyip Erdogan believes, contrary to the common theory among economists, that higher interest rates actually lead to higher prices. Under pressure from the president, interest rates in Turkey are therefore being lowered to depress the value of the Turkish lira and to stimulate the economy.

Although inflation has cooled somewhat in recent months, the cost of living in Turkey is still almost 58 percent higher than a year ago. Inflation peaked at 85.5 percent in October from a year earlier. However, according to some economists, real inflation is much higher than the official figure. The central bank’s official inflation target is 5 percent.