Istanbul As reconstruction begins after a series of devastating earthquakes in south-eastern Turkey, the central bank in Ankara lowers interest rates to a two-year low. On Thursday afternoon (local time), the monetary authorities announced that they would lower the one-week repo interest rate from nine to 8.5 percent.
Inflation in Turkey was last at 57.7 percent, after a record 85.5 percent in October last year. The real interest rate, which describes the difference between the key interest rate and inflation and is often used as a measure of the willingness to fight inflation, is therefore still very negative.
So Turkey needs money, and according to President Recep Tayyip Erdogan, it urgently needs it before the planned parliamentary and presidential elections in early summer of this year. Anger at the government is already growing. That has only heightened the urgency for the central bank to deliver a whole host of monetary stimulus. The low interest rates help with this. Because when interest rates fall, families and companies are more inclined to take out their own loans to rebuild their home or factory.
Ibrahim Aksoy, chief economist at HSBC Asset Management in Turkey, had even expected a rate cut of more than 100 basis points “due to the negative impact of the earthquake on economic activity,” the Bloomberg news agency quoted the economist as saying.
“Given the high and still mounting humanitarian and economic toll of the disaster, we see that the central bank will deliver most of the potentially planned interest rate cuts as early as February and the rest is likely to be implemented closer to the scheduled elections in May,” says Turkish economist Selva Bahar Baziki. “The rate cut is likely to increase pressure on the lira, which will curb the expected slowdown in exchange rate gains.”
Turkish President Erdogan and his wife Emine visit a hospital where injured infants and young children are treated.
(Photo: IMAGO/APAimages)
The value of the lira is likely to be further diluted by the politically desired flood of money. Last year, the lira lost 29 percent against the US dollar, and a further 0.9 percent so far this year. One US dollar currently costs around 19 lira, one euro just over 20 lira.
Experts at the London-based finance house Standard Chartered had already warned before the interest rate cut that the Turkish currency could fall to 36 lira per US dollar, at least if the ultra-loose monetary policy is continued after the elections.
Market observers had already described price increases in the days after the violent tremors in early February. Nevertheless, interest rates are now expected to fall, which should continue to drive inflation. The move still makes sense, however, because the Turkish economy urgently needs fresh money.
The disaster killed over 43,000 people in Turkey and destroyed thousands of buildings. Millions of people are homeless, hundreds of thousands have fled the region because they no longer have shelter or work. The economic cycle of a region the size of Bavaria has almost completely collapsed.
>> Read also: Up to 84 billion dollars – that’s how expensive reconstruction in Turkey will be
In the days following the devastating tremors, rental apartment prices in neighboring regions had already risen as demand for additional housing for refugees had grown. Food also became more expensive.
Anger against Erdogan’s government is erupting on the streets and on social media.
(Photo: dpa)
Immediately after the earthquake, President Erdogan’s government promised all those affected an immediate payment of 10,000 lira, around 500 euros. Earlier this week he announced that he would pay all relatives of the deceased an additional 100,000 lira (about 5,000 euros). In addition, those affected receive a kind of social assistance of around 200 euros per month and special protection against dismissal.
Whether that will be enough is uncertain. The experts at the US company Verisk Analytics, who specialize in natural disasters, estimate the economic damage from the earthquake in Turkey and Syria at more than 20 billion dollars. Only a fraction of it – a good one billion dollars – is insured.
The private Turkish company and business association Türkonfed estimates that the damage could amount to up to 84 billion US dollars. Accordingly, Turkey loses ten billion US dollars in economic power, which corresponds to around 1.2 percent of gross domestic product. In addition, there are more than 70 billion US dollars from damaged buildings and around 3 billion US dollars from lost working hours. The major US bank Goldman Sachs also expects Turkey to lose around one percent of its economic power as a result of the quake.
The state has to bear most of the damage
The World Bank has already pledged $1.78 billion (€1.65 billion) in support for Turkey to help with reconstruction. The European Union is planning a donor conference in mid-March to collect donations from states and international organizations.
But this will hardly be enough. The low insurance density also suggests that both households and the state will be left with many losses.
“The difference between economic and insured losses — the coverage gap — shows how expensive disasters are to society,” said Verisk executive Bill Churney. The state has to bear most of the uninsured damage.
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