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News > Turkey

Türkiye Delivers Policy Rate Cut Amid Earthquake Recovery

  • Banknotes of the Turkish lira.

    Banknotes of the Turkish lira. | Photo: Xinhua

Published 24 February 2023
Opinion

Interest rates are now "adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability," the Central Bank said.

On Thursday, Türkiye's central bank cut its main interest rate by 50 basis points, to 8.5 percent, a move aiming to protect the country's economy in the wake of devastating earthquakes that have added to the country's economic woes.

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Interest rates are now "adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability," the bank's Monetary Policy Committee 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 the performance of the Turkish economy in the medium term," it said.

In 2022, the central bank pursued a 500-basis-point easing cycle in line with President Recep Tayyip Erdogan's loose monetary policy to control runaway inflation and kept its policy rate steady at 9 percent in December last year and January.

When its southeastern region was hit on Feb. 6 by two successive and massive earthquakes that have so far claimed the lives of 43,556 people, Türkiye was on its way to recovering from 24-year high inflation of 85 percent recorded in October last year.

Türkiye's annual inflation dipped to 57.68 percent in January and is predicted to continue to fall throughout the year. Yet it remains staggering and households are still reeling from the high prices of commodities.

The February earthquakes would result in a hefty reconstruction expense and slower economic growth. Before the quakes, the Turkish government predicted economic growth would be 5 percent in 2022 and 5.5 percent in 2023.

According to an estimate by the Turkish Enterprise and Business Confederation, the quakes could cost the country up to US$84.1 billion. JP Morgan Bank had a more conservative estimate and said the damage inflicted by the earthquakes could cost US$25 billion.

In addition to reconstruction, there are other costs as well, like living expenses for the people affected by the earthquakes. The government has banned layoffs in the 10 quake-hit provinces, and offered financial incentives for tens of thousands of homeless.

About 13.4 million people live in the vast region affected by earthquakes, which accounts for about 9 percent of the country's gross domestic product (GDP).

Once the immediate aftermath of the disaster fades, economic growth would pick up in the medium term when reconstruction gets underway, said Baki Demirel, an economist and scholar at Türkiye's Yalova University.

"Besides the thousands of collapsed buildings, the earthquakes also damaged energy facilities, infrastructure, transportation, irrigation, and logistics, and it will take time and money to rebuild those facilities," he said.

With general elections scheduled for June, Erdogan, whose administration has faced criticism for poor coordination in earthquake rescue operations, has promised to reconstruct new homes for the millions of people affected by the earthquakes within a year.

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