Thursday, July 25, 2019

Turkey cuts rate 425 bps but to maintain cautious stance

     Turkey's central bank lowered its benchmark one-week repo auction rate by a larger-than-expected 4.25 percentage points to 19.75 percent due to an improved outlook for inflation but said it still needs to maintain a "cautious monetary stance" to ensure inflation continues to decline.
      It is the first rate cut by the Central Bank of Republic of Turkey (CBRT) under Murat Uysal, the former deputy governor who was appointed as governor on July 6 after Murat Cetinkaya was fired for failing to follow Turkish President Recep Tayyip Erdogan's instructions to lower rates.
     Cetinkaya's dismissed by president decree sparked fresh concern over the independence of the central bank as it was the first time a central bank governor had been dismissed since a 1980 military coup. Cetinkaya still had 10 months remaining on this 4-year term, which began in 2016.
     Erdogan has long put pressure on the central bank to cut rates and according to press reports the tipping point for him came after June 12, when CBRT maintained its key rate at 24.0 percent for the ninth consecutive month, disregarding Erdogan's instructions to cut the rate by 300 basis points.
     Under Cetinkaya the central bank raised rates by a total of 16 percentage points in 2018, including a shock 625 point hike in September, to curb inflation after the lira's sharp plunge in August to a record low of 6.96 to the U.S. dollar.
    Since then the Turkish lira has risen and inflation has declined, and ironically, Cetinkaya's dismissal came as analysts were already expecting him to begin cutting rates this month by around 250 basis points.
     In April the central bank had begun to shift toward easier policy by dropping an earlier reference to tightening its policy if needed and it forecast inflation would fluctuate between 12.1 percent and 17.1 percent and end 2019 at 14.6 percent.
    After a quick rise and then decline after today's rate cut, the Turkish lira settled slightly firmer at 5.7 to the U.S. dollar, continuing the appreciation seen since May 9 after hitting a 2019-low of 6.16.
      However, since the start of this year the lira has still depreciated 7.4 percent and by 33 percent since the start of 2018. In 2018 the lira fell 28 percent against the U.S. dollar.
     Turkey's inflation rate fell to 15.72 percent in June, continuing a steady decline since a 15-year high of 25.24 percent in October 2018 but is still way above the central bank's medium-term target of 5 percent.
     In today's statement the central bank said the outlook for inflation has continued to improve, citing domestic demand and tight monetary conditions supporting disinflation, supported by a decline in unprocessed food and energy prices.
     "In lights of these developments, recent forecast revisions suggest that inflation is likely to materialize slightly below the projections of the April Inflation Report by the end of the year," CBRT said.
     The central bank's 5-member monetary policy committee said maintaining disinflation was the key to reducing sovereign risk, achieving lower long-term rates and a stronger economic recovery and this requires continued "cautious monetary stance."
    It added the extent of monetary tightness would be determined the underlying trend of inflation.
     In the wake of Cetinkaya's firing, ratings agency Fitch has downgraded Turkey's sovereign rating to "BB-," saying his removal highlights a deterioration in institutional independence, economic policy coherence and credibility.
     The move also risks damaging weak domestic confidence, evidenced by rising dollarization, jeopardizes the inflow of foreign capital needed to meet Turkey's external financing requirement and worsening economic outcomes.
     Turkey's economy has shrunk in the last two years on an annual basis, with gross domestic product in the first quarter of this year down 2.6 percent after a 3.0 percent fall in the previous quarter.
      On a quarterly basis, Turkey bounced back in the first quarter with GDP expanding 1.3 percent after shrinking 2.4 percent in the fourth quarter of 2018, 1.5 percent in the the third quarter and 0.1 percent in the second quarter.
     "Recently released data indicate a moderate recovery in the economic activity," the central bank said, noting goods and services exports were on an uptrend despite the weaker global outlook, and exports are expected to continue to contribute to the gradual economic recovery.

     The Central Bank of the Republic of Turkey released the following statement:

"The Monetary Policy Committee (the Committee) has decided to reduce the policy rate (one-week repo auction rate) from 24 percent to 19.75 percent.
Recently released data indicate a moderate recovery in the economic activity. Goods and services exports continue to display an upward trend despite the weakening in the global economic outlook, indicating improved competitiveness. In particular, strong tourism revenues support the economic activity through direct and indirect channels. Looking forward, net exports are expected to contribute to the economic growth and the gradual recovery is likely to continue with the help of the disinflation trend and the partial improvement in financial conditions. The composition of growth is having a positive impact on the external balance. Current account balance is expected to maintain its improving trend.
Recently, weaker global economic activity and heightened downside risks to inflation have strengthened the possibility that advanced economy central banks will take expansionary monetary policy steps. While these developments support the demand for emerging market assets and the risk appetite, rising protectionism and uncertainty regarding global economic policies are closely monitored in terms of their impact on both capital flows and international trade.
Inflation outlook continued to improve. In the second quarter, inflation displayed a significant fall with the contribution from a deceleration in unprocessed food and energy prices. Domestic demand conditions and the tight monetary policy continue to support disinflation. Underlying trend indicators, supply side factors, and import prices lead to an improvement in the inflation outlook. In light of these developments, recent forecast revisions suggest that inflation is likely to materialize slightly below the projections of the April Inflation Report by the end of the year. Accordingly, considering all the factors affecting inflation outlook, the Committee decided to reduce the policy rate by 425 basis points.
The Committee assesses that maintaining a sustained disinflation process is the key 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, the extent of the monetary tightness 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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