Turkey’s move to cut interest rates highlights the country’s economic fragility and its exposure to geopolitical risk, say analysts.
The latest 75 basis point cut on Jan. 16 follows four consecutive cuts during the last four monetary policy meetings that were held last year. In a bid to stimulate growth, President Recep Tayyip Erdogan also hinted recently about the forthcoming interest rate cuts.
However, low interest rates are expected to undermine Turkey’s ability to appeal to domestic and foreign investors.
Foreign direct investment remains muted, totaling about $5.9 billion in 2019, and mostly concentrated on the real estate sector. Iraqi citizens were the main buyers of Turkish properties last year, followed by Iranians, Russians, Saudi Arabians and Afghans.
The current account deficit is also alarming for many economists and investors.
Struggling to recover from an economic recession since the summer of 2018, the Turkish lira lost more than a third of its value against the dollar over the last two years.
The aggressive foreign policy moves of Turkey’s government, first in Syria and now in Libya and the eastern Mediterranean, may also increase the country’s economic fragility especially considering impending sanctions from the US over its purchase of a Russian missile defense system. The deployment of Turkish forces and their ongoing training process, along with the drones and armaments that are being sent to support them, are also a burden to the economy.
Wolfango Piccoli, co-president of Teneo Intelligence in London, said the rate cut had shown once more that the government’s priority remains growth and not regaining credibility.
“The positive external backdrop means that Turkey is likely to get away with limited costs. However, this won’t last forever. There is still no indication that the government is serious in tackling the long term challenges the economy faces,” he told Arab News.
The Turkish Central Bank’s next Monetary Policy Committee is set for Feb. 19.
The dismissal of the former governor of the Central Bank, Murat Centinkaya, by President Erdogan in July sparked criticism about the independence of the bank and was considered a sign of Erdogan’s determination to keep lower interest rates by appointing a new figure closer to him.
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