Turkey’s central bank decided on June 21 to cut the overnight lending rate by 50bps to 9% in a move widely expected by the market. The lira firmed 0.3% against the dollar and stocks rose 0.34% after the rate decision.
The bank’s Monetary Policy Committee (MPC), however, decided to keep the main policy rate (one-week repo rate) unchanged for the 16th month in row at 7.5%. The overnight borrowing rate was also left on hold at 7.25%.
Declining inflation and relatively stable local currency provided room for the central bank to continue its easing cycle that started in March and brought the overnight lending rate down by a cumulative 175bps.
With inflation expected to stay within the central bank’s target range in the next few months, at least one more cut is expected, analysts at Capital Economics suggest in a note. “We expect inflation to remain at around its current level (6.6% y/y) over the next few months, which is within the central bank’s target range (5±2%). If we’re right on that, there’s probably scope for at least one more 50bp cut in the current easing cycle,” the analysts note.
However, they expressed concerns about the sustainability of the easing cycle. “The current account deficit is still wide, meaning the lira remains vulnerable to a deterioration in investor sentiment. Moreover, despite the reference in today’s statement to improving core inflation, underlying price pressures are strong.”
This is the third rate cut Murat Cetinkaya has implemented since taking over as central bank governor in April. The government is likely to keep the pressure on the rate setters until the bank cuts its rates to levels that politicians think low enough to stimulate economic growth.
“Inflation has displayed a marked decline in recent months, mainly due to favourable course of unprocessed food prices and the improvement in the core inflation trend,” the bank said in a statement released after the MPC meeting. The bank’s assessment of core inflation developments has changed since the previous meeting. At the May 24 meeting, the bank argued that improvement in the underlying core inflation trend remains limited. Probably, the bank will use its core inflation argument as an excuse for further rate cuts.
“However, the developments in services inflation and unit labour costs necessitate the maintenance of a tight liquidity stance,” the statement added. The bank reiterated that future monetary policy decisions will be conditional on the inflation outlook.
As far as growth dynamics are concerned, the bank suggested that economic activity displays a moderate and stable course of growth. “While domestic demand continues to have a positive impact on growth, demand from the European Union economies continues to support exports,” it said.
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