Wednesday, April 22, 2020

Turkey cuts rate 8th time on downside inflation outlook

    Turkey's central bank cut its policy rate for the fourth time this year and for the 8th time since July 2019, saying the outlook for inflation is to the downside from weak domestic demand, inflationary expectations and producer prices stemming from the efforts to contain the spread of the coronavirus.
     The Central Bank of the Republic of Turkey (CBRT) cut its one-week deposit rate by another 100 basis points to 8.75 percent and has now cut it by 325 basis points this year and by 15.25 percentage points since July last year when it began its easing cycle after a new governor was installed.
    As other central banks worldwide, CBRT has been using a wide range of its monetary tools to ease its policy stance and has injected liquidity into financial markets to ensure they continue to function smoothly so they can supply credit to businesses and the economy.
     CBRT has also been purchasing government debt, including from the country's unemployment insurance fund, and on April 17 it doubled its limit on its asset purchases to 10 percent of its total assets from 5 percent.
     Turkey's headline inflation rate eased to 11.86 percent in March from 12.37 percent in February and while core inflation rose to 11.65 percent, CBRT said inflation expectations, demand conditions and producer prices were contributing to a "mild trend" in core inflation indicators.
      Despite a depreciation of the Turkish lira due to global developments, a continued sharp fall in commodity prices, especially crude oil and metals prices, were having a favorable effect on the outlook for inflation.
     "Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance," CBRT said, adding maintaining a sustained disinflation process remains key to lowering the sovereign risk, lowering long-term interest rates and a stronger economic recovery.
      Turkey's lira, which has been falling for the last decade, has depreciated sharply this year and fell further in response to today's rate cut to trade at 6.99 to the U.S. dollar, down almost 15 percent this year.

      The Central Bank of the Republic of Turkey issued the following press release:

"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 9.75 percent to 8.75 percent.
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. 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. 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. Current account balance, which recently recorded significant improvement, is expected to follow a moderate course throughout the year due to the restraining effects of commodity prices and imports.
Developments in inflation expectations, domestic demand conditions and producer prices have contributed to a mild trend in core inflation indicators. Despite the recent depreciation in the Turkish lira due to global developments, continued sharp decline in international commodity prices, especially crude oil and metal prices, affects 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. In this respect, it is considered that risks on the year-end inflation projection are on the downside. Accordingly, the Committee decided to make a 100 basis point cut in the policy rate.
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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