Thursday, January 16, 2020

Turkey cuts rate "measured" 75 bps, sees inflation easing

     Turkey's central bank lowered its policy rate by another 75 basis points to 11.25 percent and reiterated its monetary policy stance is consistent with the projected path of slowing inflation but it still needs to maintain a "cautious" policy stance to ensure inflation declines.
    It is the first rate cut by the Central Bank of the Republic of Turkey (CBRT) this year but continues the rapid pace of easing since July last year when the current governor, Murat Uysal, took over from Murat Cetinkay, who was fired for failing to follow President Recep Tayyip Erdogan's instructions to lower rates.
    Since July 2019 CBRT has cut its key rate by 12.75 percentage points but inflation has also come down sharply since topping 25 percent in October 2018 following a currency crises that sent import prices soaring.
    In 2019 Turkey's inflation rate decelerated from just over 20 percent in January to a low of 8.55 percent in October before rising in November and further in December to 11.84 percent, fueling expectations the central bank may trim the size of today's rate cut to around 50 basis points.
    CBRT has forecast inflation of 12 percent by the end of 2019 and expects it to decline further to 8.5 percent by the end of 2020, with a decision in December to scrap an automatic tax increase on alcohol and tobacco products in the first half of this year helping curb inflation further.
     "The course of inflation is considered to be broadly in line with the year-end inflation projection," CBRT said, adding the exchange rate, domestic demand and producer prices have contributed to a mild trend in core inflation.
     The central bank repeated its guidance that the monetary policy stance would be determined by considering the underlying trend in inflation to ensure it continues to decline.
     In December the International Monetary Fund (IMF) forecast inflation would remain largely stable at around 12 percent in both 2020 and 2021, adding "the recent monetary policy easing has gone too far," given the still-high inflation expectations and rapid credit growth in state-owned banks.
    Turkey's lira, which fell 33 percent in 2018 and another 11 percent in 2019, has bounced back in the last week and rose further today following the central bank's decision.
     The lira rose 0.5 percent to 5.85 per U.S. dollar today to be up 1.7 percent this year, helped by the recent rise in emerging market assets.

     The Central Bank of the Republic of Turkey released the following press release from its monetary policy committee:

"Participating Committee Members

Murat Uysal (Governor), Murat Çetinkaya, Ömer Duman, Uğur Namık Küçük, Oğuzhan Özbaş, Emrah Şener, Abdullah Yavaş.
The Monetary Policy Committee (the Committee) has decided to reduce the policy rate (one-week repo auction rate) from 12 percent to 11.25 percent.
Recent data indicate that recovery in economic activity continues. Sectoral diffusion of economic activity continues to improve. However, investment demand remains weak. While favorable effects of improved competitiveness prevail, weakening global economic outlook tempers external demand. As the contribution of net exports to economic growth declines, economic recovery is expected to be sustained with the help of the ongoing disinflation process and improvement in financial conditions. Current account balance, which has recently recorded significant improvement, is expected to maintain a moderate course with the contribution of supportive policy measures.
Weakness in global economic activity and low levels of global inflation strengthen expectations regarding the continuation of expansionary monetary policies in advanced economies. Current global financial conditions and the recent partial improvement in expectations regarding global trade support the demand for emerging market assets and the risk appetite. Nevertheless, rising protectionism, uncertainty regarding global economic policies and geopolitical developments are closely monitored for their impact on capital flows, international trade and commodity prices.
Inflation outlook continued to improve and inflation expectations sustained their wide-spread decline. The improvement in macroeconomic indicators, inflation in particular, supports the fall in country risk premium and helps contain cost pressures. Developments in the exchange rate, domestic demand conditions and producer prices have contributed to a mild trend in core inflation indicators. The course of inflation is considered to be broadly in line with the year-end inflation projection. Accordingly, considering all factors affecting the inflation outlook, the Committee decided to make a measured cut in the policy rate. At this point, the current monetary policy stance remains consistent with the projected disinflation path.
The Committee assesses that maintaining a sustained disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, monetary stance will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."


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