For the straight ninth time in a row the central bank of Turkey (CBT) cut its policy rate. The bank which so far had surprised the markets via larger than expected rate cuts, this time around delivered the exact expectation with 50 basis points and lowered the one week repo rate to 8.25% from 8.75%.
Turkey’s policy rate was at 24% back in July 2019.
In the latest inflation report released in April, the CBT revised down its 2020 expectation to 7.4% from 8.2% in the previous report. The bank sees an acceleration of the down trend in inflation during the summer months of 2020 towards 8% in September, and to continue easing to 7.4% by the end of 2020. Currently, Turkey’s consumer price inflation (CPI) is at 10.9% with the forward-looking CPI expectations for 12-month and 24-month at 9.20% and 8.30%, respectively.
The new bout of TL weakness since start of the year and a sharp slump in domestic demand are two contradicting forces that weigh on the future course of inflation in Turkey. While 8-8.5% CPI inflation for 2020 end looks more probable, the CBT’s 7.4% end of year estimation still looks challenging. The CBT’s renewed swap deal with Qataris to USD15billion and its revised down inflation expectations creates further room for the bank to ease its policy rate in June and on wards; as President Erdogan is betting on revised credit demand to jump start the economic activity in the remainder months of the year.
No need to say, the weak swap agreement along with Turkey’s hefty short-term external fx debt payments keep Turkish lira fragile given the rate cuts will continue. Thus, further TL weakness appears in the cards along with an additional 100 basis points rate cut from the current 8.25%.
Here is the CBT’s rate cut announcement:
As developments regarding the spread of the coronavirus substantially weaken global growth outlook, central banks in advanced and emerging economies continue to take expansionary measures. While uncertainties on global economic recovery remain high, normalization steps taken by several countries are being watched. The pandemic disease is closely monitored for its evolving global impact on capital flows, financial conditions, international trade and commodity prices.
Having displayed a strong upward trend in January and February, thanks to the improvement in financial conditions, economic activity has started to weaken in mid-March due to the effects of the coronavirus pandemic on external trade, tourism and domestic demand. While the weakening in economic activity became more pronounced in April, high-frequency indicators for the first half of May display signs of bottoming-out following the steps taken towards partial normalization. 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. In this respect, recent monetary and fiscal measures will contribute to financial stability and post-pandemic recovery by supporting the potential output of the economy. Despite the fall in exports and tourism revenues due to the pandemic, current account balance is expected to follow a moderate course throughout the year due to the restraining effects of commodity prices and imports.
Developments in inflation expectations and domestic demand conditions have contributed to a mild trend in core inflation indicators. Despite the recent depreciation in the Turkish lira due to global developments, international commodity prices, especially crude oil and metal prices, affect inflation outlook favorably. While the rise in unit costs resulting from declining production and sales is closely monitored, the disinflationary effects of aggregate demand conditions are estimated to have increased. Although consumer inflation might follow a slightly higher course in the short-term due to seasonal and pandemic-related effects on food prices, demand-driven disinflationary effects will be more prevalent in the second half of the year. Accordingly, considering all factors affecting the inflation outlook, the Committee decided to make a measured cut in the policy rate. Under the current monetary policy stance, inflation outlook is considered to be in line with the year-end inflation projection.