Turkey's central bank, CBRT, reduced its overnight lending rate by 25 basis points to 8.5% at a meeting on September 22 as it seeks to shore up the ailing economy.

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 has suffered from a string of terror attacks and uncertainty following the July's failed coup attempt. 

“This move reflects the slowing domestic economy, and the stability of the lira post failed coup, plus the still well bid global EM space,” said Tim Ash at Nomura. “The CBRT are clearly dovish - and want to help the government underpin growth,” he added.

The bank left the main policy rate (one-week repo rate) unchanged for the 19th month at 7.5% and kept the overnight borrowing rate at 7.25%.

In a statement released after the monetary policy committee meeting the bank admits that “recently released data and indicators regarding the third quarter display a deceleration in the economic activity,” but is optimistic that “with the supportive measures and incentives provided recently, domestic demand is expected to recover starting from the final quarter.”

As far as the inflation dynamics are concerned, the CBRT thinks the slowdown in aggregate demand contributes to the gradual fall in core inflation. But it still warned that “With the help from falling food prices, headline inflation is expected to display a decline in the short term. Yet, the recent tax adjustment in fuel prices and other cost factors limit the improvement in inflation and thus necessitate the maintenance of a cautious monetary policy stance.”

The bank reiterated that its future monetary policy decisions will be conditional on the inflation outlook. “We expect the CBRT to complete its policy simplification by delivering a 25bp ceiling cut and a 25bp floor cut next month,” said J.P. Morgan analyst Yarkin Cebeci on September 21 ahead of the rate-setting meeting. There is material risk that the CBRT overdoes the easing and needs to reverse some of its moves if/when global conditions change, according to Cebeci.