Türkiye’s Central Bank (TCMB) decided on Thursday to reduce the policy rate (one-week repo auction rate) from 9 percent to 8.5 percent, after keeping it unchanged for two consecutive months. In November last year, the bank’s Monetary Policy Committee (MPC) had kept the key interest rate unchanged as the country’s President Recep Tayyip Erdogan insisted on keeping borrowing costs below 10 percent, arguing that high interest rates cause inflation. The MPC move on Thursday is the lowest in three years. It comes to weather the fallout from the devastating earthquakes that killed more than 43,000 people in the country's south on Feb 6. “It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake,” the central bank said in a press release following a meeting of its MPC, headed by Governor Sahap Kavcioglu. It added that although recently released data point to a stronger economic activity than anticipated, recession concerns in developed economies as a result of ongoing geopolitical risks and interest rate hikes continue. “While the negative consequences of supply constraints in some sectors, particularly basic food, have been alleviated by the strategic solutions facilitated by Türkiye, the high level in producer and consumer inflation continues on an international scale,” the bank’s MPC press release stated. It added that the effects of high global inflation on inflation expectations and international financial markets are closely monitored. According to the latest data from the Turkish Statistical Institute (TurkStat), Türkiye's annual consumer inflation fell to 57.68% in January, an 11-month low, compared to 64.27% in December and 84.39 % in November. It had reached 85.51 percent in October 2022, the highest inflation rate recorded during the provided time period. Financial markets had been expecting a rate cut even before the earthquake that hit 10 Turkish provinces south and east of the country. And with reconstruction costs estimated at billions of dollars, the disaster has further shocked Türkiye’s economy which suffered from an inflation exceeding 80% for the first time since September 1998, threatening growth to slowdown by 1 to 2.5% this year. On Thursday, TCMB said that before the earthquakes, leading indicators have been pointing to a stronger domestic demand compared to foreign demand as well as an increase in the growth trend in the first quarter of 2023. It added that 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 performance of the Turkish economy in the medium term. The bank said that while the share of sustainable components of economic growth increases, the stronger than expected contribution of tourism revenues to the current account balance continues throughout the year. On the other hand, domestic consumption demand, high level of energy prices and the weak economic activity in main trade partners keep the risks on current account balance alive, it added. “The CBRT will continue to use all available instruments decisively until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved in pursuit of the primary objective of price stability,” the bank’s press release affirmed.