Turkish Central Bank Cuts Interest Rate Sharply Despite Weaker Lira

Despite a weaker currency exchange rate, Turkey's central bank reduced its key interest rate by a sharp 100 basis points to mitigate the economic fallout from the coronavirus outbreak.

The Monetary Policy Committee of the Central Bank of the Republic of Turkey, led by Governor Murat Uysal, cut the policy rate, which is the one-week repo auction rate, to 8.75 percent from 9.75 percent. Economists had expected only a 50 basis point reduction.

This was the third rate cut so far this year. At an emergency meeting in March, the bank had reduced rate by 100 basis points and announced a series of measures to provide liquidity and credit to companies.

In order to contain negative effects of the pandemic on the Turkish economy, it is of crucial importance to ensure the healthy functioning of financial markets, the credit channel and firms' cash flows.

Policymakers said risks to the year-end inflation projections are on the downside.

In March, inflation slowed to 11.86 percent from 12.37 percent in February, driven by the decline in oil prices. The bank had earlier projected inflation to ease to 8.2 percent by the end of the year.

The central bank said it will continue to use all available instruments in pursuit of the price stability and financial stability objectives.

The bigger-than-expected rate cut has added further selling pressure on the Turkish lira. The central bank may have to step in to limit the weakness in currency.