Turkey’s central bank will have its Monetary Policy meeting this week; on Thursday. Without any doubt the market expects another 25-50 basis points rate cut from the bank from its current one week repo rate of 8.25%. Currently, the bank’s average funding rate is at 7.6%.
The rate cut will be the 11th in a row following the appointment of the new governor by President Erdogan last July. The government’s need to heat up domestic demand and investments following the rate hikes due to August 2018 currency crisis was the starting point. Turkey’s policy rate was at 24% back in July 2019. Yet, as time passed by and Turkey’s notorious CPI inflation came creeping up again, the central bank refrained from putting a hold on its rate cuts; again upon the call of Turkey’s President since he sought stronger growth.
In late 1Q20, the COVID-19 shock began and the related lockdowns hit domestic demand along with external demand pushing the government to fuel its fiscal and monetary support to the economy. Turkey did what many other countries did to protect its economy with a limited set of tools,
Turkey’s consumer price index is at 11.39% as of May with its core inflation at 10.3%. 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. Yet, the new round 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. Turkey’s CPI inflation will hardly be below 10% by the end of 2020.
Moreover, given the current uncertainty environment and continuing external debt payments f the real sector, low and lower interest rates do not seem to stimulating investments.
Nonetheless, another 50 basis points rate cut is expected from the central bank this week with another 25 basis points due for July 2020. These two will probably bringing an end to Turkey’s easing cycle with support from the fiscal side continuing into 2021.