Central Bank of the Republic of Turkey/Bloomberg

Economy

Turkey cuts interest rate by 16.5 per cent, signalling slower easing ahead

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The Monetary Policy Committee said inflation is likely to end the year below its earlier forecasts but suggested less scope for deeper easing.

Sunday 15, September 2019

Turkey delivered another interest-rate cut that exceeded forecasts while signalling the central bank could now proceed with caution as it navigates the conflicting demands of the presidency and markets, reported Bloomberg.

Governor Murat Uysal reduced the key rate to 16.5 per cent from 19.75 per cent, exceeding the forecasts of most economists.

In a statement, Turkiye Cumhuriyet Merkez Bankasi (TCMB) , said, “At this point, the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path.”

Boxed in by President Recep Tayyip Erdogan, Uysal is following up on his record monetary easing in July with his second bold move, bringing cuts under his watch to 7.5 percentage points while still leaving rates above inflation.

As the Turkish economy is only starting to make up ground lost during recession and there is little room for fiscal stimulus, the central bank is taking centre stage for Erdogan, who believes that high rates cause rather than curb price growth.

The governor, whose predecessor was fired for failing to act faster, has already signalled that more cuts were on the cards but also vowed to preserve a reasonable rate of real return for investors.

According to TCMB’s latest forecast, Turkey’s price growth, currently at 15 per cent, will end the year at 13.9 per cent.

A steep deceleration in price growth that looms as early as this month probably clinched the argument for Uysal. According to Bank of America, before the latest rate cut, Turkey’s benchmark was double the average for its emerging-market peers, providing room for four percentage points of easing relative to the central bank’s year-end forecast for inflation.

When Uysal slashed the benchmark by 425 basis points in July, against a market expectation of 250 basis points, it was the first reduction since 2016 and the biggest since a shift to inflation targeting in 2002.

Just days ahead of this week’s meeting, Erdogan laid down a marker for the central bank, suggesting Turkey will lower borrowing costs to single digits soon and inflation will follow suit.

TAGS : Turkiye Cumhuriyet Merkez Bankasi, President Recep Tayyip Erdogan, Governor Murat Uysal

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