Anatomy of the interest rate cut

Despite the increase in inflation, the CBRT started the interest rate cuts that President Tayyip Erdoğan had wanted for a long time on September 23, 2021, and as of this date, the depreciation of the TL against the dollar accelerated.


The early interest rate cut message first began with the CBRT’s failure to refer to its commitment to apply interest rates above the inflation rate at its investor meeting at the beginning of September. Thus, the first preparation for the interest rate cut, which President Tayyip Erdogan has long wanted, was created at the investor presentation in September 2021.

Despite the fact that inflation rose above 80% after the first rate cut, the CBRT unexpectedly lowered the policy rate by another 100 basis points to 13% on August 18, in order to compensate for the loss of momentum in economic activity and to support employment and industrial production.

This economic mix aims to provide cheap credit to stimulate exports and economic growth within the scope of the current account surplus target, and to this end supports an unorthodox policy.

Below are five charts showing the effects of monetary easing and the subsequent depreciation of the TL:


The depreciation of the TL and the increase in inflation have been a headache for the Turkish economy for a long time, and although the CBRT’s continued lowering of the policy rate despite the rising inflation supports growth, this step is felt in many areas from inflation to risk premium. Foreign investors, on the other hand, are moving away from money markets, especially bonds.

With the effect of foreign investors’ withdrawal, the TL has lost 54% of its value against the dollar since the CBRT started its easing cycle in September last year, making it the worst performing currency among emerging market currencies.


Inflation, which rose due to the quarantine practices caused by the epidemic, increased further with the invasion of Ukraine by Russia. Russia’s invasion of Ukraine caused energy and food prices to rise.

This has been felt quite severely in countries like Turkey, which import many grains and other foodstuffs largely from Russia.

Although consumer prices increased by 1.46 percent monthly and 80.21 percent annually in August, below the expectations, annual inflation reached its new highest level since the end of 1998. The annual increase was 90.25 percent in food.

CPI was announced at 19.25 percent in August last year.


Falls and increases in oil prices will increase Turkey’s energy bill from $50 billion last year to $100 billion this year.

The level at which the energy cost will occur in the upcoming period is being followed, as it is a determining factor on the foreign exchange balance in the current policy.

Since Turkey imports almost all of its energy needs, the foreign trade balance and import-induced inflation are very sensitive to the rise and fall in oil prices.

Brent crude oil futures have increased by almost a quarter since September last year, but when oil prices are calculated in TL, this corresponds to an increase of 170 percent.


Within the scope of the economic program announced last year, the government aims to turn the chronic current account deficit into a surplus by supporting production and exports with low interest rates. However, this target is struggling to be met due to rising global energy and commodity prices.

Foreign trade deficit increased by 147% in July compared to the same period of the previous year and became 10.69 billion dollars. In July, exports increased by 13.4% compared to the same month of the previous year and reached 18.55 billion dollars, while imports increased by 41.4% to 29.24 billion dollars.

Goldman Sachs announced that leading data confirms this trend.

According to the foreign trade data for August announced by the Ministry of Commerce, the foreign trade deficit increased by 161.8% to $1.28 billion in August. The foreign trade deficit stood at $4.3 billion in August last year.

Analysts state that the global economic slowdown and the expected recession in Europe will not be enough to reduce the foreign trade deficit.


CDSs, which show the cost of insuring Turkey’s five-year debt against bankruptcy, have risen sharply in the last 12 months due to the effects of high inflation, depreciation in TL and negative real interest rate, as well as the problems in the global market and risk aversion.

Turkey’s five-year CDS has more than doubled since September 1, 2021, reaching 742 basis points, according to S&P Global Market Intelligence data. CDS meanwhile had climbed as high as 900 basis points.