Turkey’s central bank delivers no surprises as it cuts again despite rising inflation

By bne IntelliNews August 23, 2016

Turkey’s central bankers delivered no surprises at their meeting on August 23 as they cut again the overnight lending rate by 25 basis points (bp) to leave it at 8.5%.

The move was widely expected by the market with the government keeping pressure on the central bank to continue its easing cycle to support the economy that is recovering from last month’s failed coup attempt. President Recep Tayyip Erdogan, who favours consumption-led growth, has repeatedly called for cheaper credit and urged commercial banks earlier this month to reduce rates promising actions against those that “go in the wrong direction”.

The central bank’s Monetary Policy Committee (MPC) cut the overnight lending rate for the sixth month in a row in August bringing it down by a cumulative 225bp since the start of the easing cycle in March. The bank kept the main policy rate (one-week repo rate) unchanged for the 18th month in a row at 7.5% and left the overnight borrowing rate at 7.25%.

Global conditions have helped mitigate the coup’s impact on financial markets, the central bank said in a statement announcing the rates. “The adverse impact of domestic developments in mid-July on market indicators has been largely reversed due to improved global risk appetite and the recent measures,” the bank said.

The dovish stance suggests further rate cuts are on the cards, analysts at Capital Economics write in a note. “We think there may be scope for, perhaps, 50bp of cuts (to 8.0%), in 25bp steps at the next two Council meetings.”

By doing so, however, the MPC appears to be underestimating the risks facing the Turkish economy. “For one thing, the MPC is of the view that inflation will fall. In contrast, we expect the headline rate to rise to close to 10% around the turn of the year as the impact of oil price falls begins to fade,” Capital Economics notes.

Headline inflation  accelerated to 8.79% in July from 7.6% y/y in June remaining high above the central bank’s 5% target. Future monetary policy decisions will be conditional on the inflation outlook, the central bank said, adding that 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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