ANKARA, Turkey (AP) — Turkey’s central bank has recently made waves by lowering its key interest rate by 2.5 percentage points to 45% as of the latest meeting held on December 2024. This adjustment marks the second consecutive rate cut within months, demonstrating the central bank's responsiveness to the easing inflation trends affecting the country.
The Monetary Policy Committee of the bank confirmed the reduction of the benchmark one-week repo rate from 47.5% to 45%. Observers note this move follows the previous rate cut of the same magnitude just one month prior, raising questions about the central bank's commitment to managing the high inflation levels impacting Turkish households.
The central bank's statement acknowledged the slight improvement in inflation expectations but emphasized persistent risks to the disinflation process. "While inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process," the committee noted, highlighting the challenges the country faces as it seeks to stabilize its economy.
Although annual inflation figures showed some moderation, registering at 44.38% in December 2024 compared to 47.09% the previous month, independent economists caution the actual inflation rate may be considerably higher. Inflation has surged alarmingly in Turkey over recent years, primarily due to the depreciation of the Turkish lira and the controversial economic policies implemented by President Recep Tayyip Erdogan.
Erdogan's approach has focused on keeping interest rates low even amid rising inflation, arguing against mainstream economic principles. "Erdogan has long argued high interest rates cause inflation, which runs against mainstream economic theory," reported AP, underscoring the unique challenges facing the Turkish economy.
Looking forward, Turkey’s financial strategy appears to revolve around narrowing the budget deficit. Analysts suggest the government will aim to cut back on personnel spending and social security costs by limiting wage increases to below the rate of inflation. This will be imperative as the upcoming fiscal year approaches.
Funding such strategies will not come without its challenges. Despite plans to reduce earthquake-related expenditures, meeting the anticipated budget deficit target of 3.1% of GDP is expected to be difficult. ING forecasts the budget and primary deficits will be approximately 3.4% and 0.2%, respectively.
The central government's reliance on domestic financing and the issuance of Turkish government bonds (TURKGBs) is set to increase significantly. This year, gross borrowing needs are projected to leap by 33%, rising from TRY2,494 billion to TRY3,313 billion. Although these numbers reflect nominal increases, they indicate relatively stable borrowing needs as percentages of GDP.
To address these financing needs, the Ministry of Finance appears committed to increasing local funding, expecting TURKGBs to cover about 73% of all borrowing needs. This shift is indicative of the government’s strategy to manage financing demands amid rising debt service costs and inflationary pressures.
The focus will remain on increasing the average maturity of TURKGBs with expectations for issuances primarily occurring within the 5-10 year segment. Given anticipated cuts to the central bank interest rates and the concentration of maturities projected for the coming quarters, analysts should watch for increased TURKGB supply later in the year.
Turkey’s plans for external financing also remain alive, with signals pointing to the government outline of ambitious gross issuance plans of around $11 billion. This approach will help manage the maturity profile and potential solver challenges from upcoming debts.
This year’s market dynamics appear promising, with ING highlighting the recent trends following both corporate and financial issuers. Overall, Turkey seems to be prepared for another active year in financial markets, balancing the need for domestic and foreign financing as it tackles the pressing economic realities of inflation and public debt.
With these strategies set forth by the central bank and the Turkish government, questions surrounding the effectiveness of their economic policies linger. Will the informative adjustments reduce inflation and stabilize the economy? Only time will tell how these developments will impact the average Turkish citizen, faced with the day-to-day trials of rising costs and financial uncertainty.