Turkey’s central bank decided on May 24 to cut the overnight lending rate by 50bps to 9.5% in a move widely expected by the market as pressure on the bank mounts amid the recent government reshuffle.
This is the second rate cut Murat Cetinkaya has implemented since taking over as central bank governor slightly over a month ago. He started his term in office with another 50bps cut. The bank’s Monetary Policy Council (MPC), however, kept the main policy rate (one-week repo rate) unchanged for the 15th month in row at 7.5%. The overnight borrowing rate was also kept steady at 7.25%.
The decision to lower the overnight lending rate, the third straight so far, provides further evidence that political pressure to ease monetary policy is outweighing concerns about the currency in the MPC’s decision making, William Jackson at Capital Economics writes in a note. “It seems that the council is being influenced by demands from President Erdogan and his allies for lower interest rates to stimulate the economy,” the analyst notes, adding that he expects the rate to be lowered to 8.5% by the end of the year.
The lira lost around 6% in value against the US dollar in recent weeks amid concerns about a shift towards more authoritarian policymaking under Erdogan as well as less dovish comments from the US Fed. Still, the currency recouped some of the losses ahead of the central bank’s rate setting meeting today after it became clear that market-friendly Mehmet Simsek kept his post as deputy premier as the new Prime Minister Binali Yildirim announced his cabinet. The lira traded at 2.9668 per dollar at 2:20pm local time, gaining from 2.9740 before the rate-setting meeting.
“Inflation has displayed a marked decline, mainly due to unprocessed food prices. However, improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance,” the bank said in a statement released after the MPC meeting.
Economic activity, supported by domestic demand and export demand from the EU, displays a moderate and stable course of growth, the central bank also said. It, however, warned that global volatility has increased recently. The bank reiterated that future monetary policy decisions will be conditional on the inflation outlook. “Taking into account inflation expectations, pricing behaviour and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.”
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