How low can you go? Five questions for Turkey’s central bank

How low can you go? Five questions for Turkey’s central bank

Turkey’s central bank is expected to cut interest rates again this week despite a currency crash and soaring inflation as President Tayyip Erdogan keeps up the pressure on policymakers to promote growth ahead of elections in 2023.

The bank has slashed its key rate (TRINT=ECI) by 400 basis points to 15% since September as part of Erdogan’s plan to prioritise exports and lending, even though economists and opposition lawmakers say the moves are reckless.

The central bank has also sold dollars four times this month to slow a volatile sell-off that has left the Turkish lira closing in on 15 to the greenback – a record low and half its value at the beginning of 2021.

Here are five questions ahead of the central bank’s policy-setting meeting scheduled for 2 p.m. (1100 GMT) on Thursday:


The bank has signalled it will cut rates once more this month before pausing in January. Erdogan has not specified how low he wants rates to go but has repeated that cuts are needed.

Analysts poll expect a 100 basis-point cut this week. Only one respondent predicted rates would remain on hold, given that more easing could exacerbate the lira’s depreciation and soaring inflation, which was running at 21.3% last month.

On a conference call with foreign investors this month, a central bank policymaker said in response to a question that there was a higher probability of rates staying at 15% in December given the market turmoil, according to one participant.

But most analysts believe Turkey’s easing cycle will continue, even though most central banks globally are tightening policy, leaving the country with deeply negative real rates.

To pave the way, Erdogan replaced the leadership at the central bank and finance ministry with like-minded officials this year. All have embraced his low-rates mantra.

“The placement of pawns in important positions indicates that the country’s fight for low interest will continue despite the market’s heavy rejection. But the market always wins this chess game,” said Ipek Ozkardeskaya, an analyst at Swissquote.


Turkey’s chronic trade imbalance means the lira’s weakness translates into higher inflation via imports.

Reflecting the currency’s depreciation, Turkey’s producer price index soared nearly 55% in November from a year earlier, prompting economists to predict that headline consumer prices would hit 30% next year – five times the official target.

Another risk is that businesses shy away from the lira given the unpredictability of both exchange and inflation rates.

“There is no commerce now, there is no cash,” said Kemal Cakir, 32, a sales representative at Cakirogullari Agricultural Machinery in the central city of Konya. “We expect to see bigger losses in the future.”

A more remote possibility is that companies struggle to meet foreign debt obligations, given the country’s overall 12-month refinancing needs of nearly $170 billion.

There was, however, a current account surplus of $3.1 billion in October, helping to ease such concerns. Erdogan has said that remaining in the black is vital to easing inflation and becoming more self-sufficient.


Opinion polls show both Erdogan and his Islamist-rooted AK Party are sliding to levels of unpopularity not seen in years and that he would probably lose a presidential election run-off against some potential rivals.

The rate cuts are a risky wager by Turkey’s leader of 19 years that he can bring down high unemployment by squeezing businesses to invest and hire, even though rising prices and the lira’s collapse are eating into Turks’ earnings.

Some AK Party voters said they could support other parties at the next election.

Others are keeping the faith in a president who has a solid base among the rural and urban working and middle classes. A Metropoll survey shows his approval rating has held near 40% over the last few months.

“Business is terrible and we have been deeply affected as well. Still, I believe Erdogan will definitely be able to fix this situation,” said a 50-year-old restaurant owner in the Black Sea city of Samsun who declined to be named.


The central bank’s ability to continue intervening to address what it calls “unhealthy” foreign exchange (FX) rates depends on several factors: how far it taps already depleted FX reserves, how much lower it cuts rates, policy decisions by the U.S. Federal Reserve and other central banks, and whether Turks add to their near-record hard currency holdings of $231 billion.

Technically, the bank could tap into $124 billion of gross reserves but net reserves are only worth $22 billion – and its holdings are deeply negative when swaps with state banks are taken into account.

On Monday alone, the bank spent $2 billion to $2.5 billion buying lira after it crashed briefly to a record 14.99, according to calculations by bankers. It sold $2.5 billion in the first three market interventions last week, they said.

Atilla Yesilada, analyst at GlobalSource Partners, estimated that the bank’s interventions could last up to six months, as long as monetary policy is unchanged. But he and others say the sales waste precious reserves at a time of economic stress.

“Ultimately, the era of floating exchange rates is a confidence game to a large extent, and (the central bank) has lost it,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.


The rapid slide in the lira has upended household budgets, scuttled travel plans and left many Turks scrambling to cut costs. Many now queue for subsidised bread in Istanbul, where the municipality says the cost of living is up 50% in a year, including a 71% jump in rents.

Soaring import prices have created shortages of medicines and briefly halted sales of cell phones and other electronics as retailers scrambled to recalculate prices last month. Builders say some projects are being delayed by high materials prices.

The government is moving to present an additional 2022 budget due to the need for more spending and a higher minimum wage.

Street protests have been only sporadic due largely to a years-long police crackdown on civil disobedience.

“The only push-back that the president is likely to face in the coming months is from social unrest, triggered by ever-rising inflation and disorderly markets triggered by continuing depreciation of the lira,” said Lawrence Brainard at TS Lombard, a consultancy in London.