Turkey’s central bank cuts 2019 inflation forecast to 13.9%

By bne IntelliNews July 31, 2019

Turkey’s central bank on July 31 cut its inflation forecast for 2019 to 13.9% from 14.6%, but left next year's outlook unchanged at 8.2%.

In mid-June, Turkey’s main opposition party CHP filed a motion to parliament stating that adjustments to the methodology used by the Turkish Statistical Institute (TUIK) when calculating inflation were unprecedented and damaged the credibility of the country’s inflation data.

The value of the Turkish lira (TRY) against the dollar fell by around a third last year after Turkey’s economy overheated and the country was hit by a currency crisis. The currency crunch sent inflation soaring above 25% and in response the central bank hiked its policy rate to 24%. The inflation rate has since officially fallen to below 16% and, whatever observers think about the reliability of the figure, it has paved the way for the national lender to cut rates. It last week cut the key policy rate by 425 bp to 19.75%, bringing in the biggest interest rate reduction in at least 17 years.

There is, however, also scepticism that Turkey’s central bank retains its monetary independence. President Recep Tayyip Erdogan lately fired the national lender’s governor for not following instructions on interest rates. The big rate cut was announced by his successor Murat Uysal after Erdogan had predicted that the remainder of this year would see monetary easing in Turkey.

Announcing, the central bank’s changed inflation projections, Uysal, who has insisted the regulator retains monetary independence, said policy would depend on the inflation outlook.

"In the upcoming period we have a considerable room for manoeuvre on rates. Its application, timing and size will depend on the improvements on price and financial stability," Uysal told reporters. "We will make [the decision] based on data."

The prospect of a spreading monetary easing trend among major central banks including the US Fed is proving a big help in simultaneously bringing in rate cuts while not destabilising the Turkish lira after its meltdown last year.

In the past six days, the lira has clocked up a straight run of gains against the dollar.

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