The Central Bank of the Republic of Turkey (CBRT) on Thursday slashed its benchmark policy rate by 200 basis points, twice as much as expected.
The policy rate – also known as the one-week repo rate – was lowered to 16% from 18%, the central bank said in a statement following its 10th Monetary Policy Committee (MPC) meeting this year. The bank had also surprised markets last month with a 100-point cut.
It said on Thursday that there would be little more room to ease policy through year-end, given what it called "transitory" supply-side pressure on prices of food, energy and other imports.
The rate cut was twice as much as the most dovish estimate in most surveys. A Reuters poll had forecast a cut of 50 or 100 basis points. The median in the Anadolu Agency (AA) survey of 26 economists stood at a cut of 50 basis points. Six economists expected no change, while eight predicted the rate to fall by 50 basis points, one by 75 basis points, and 11 by 100 basis points.
According to the median estimate in a Bloomberg survey of 15 analysts, the MPC was expected to deliver a cut of 100 basis points.
The Turkish lira weakened as much as 3% to a record 9.501 versus the dollar before paring some losses.
The decision comes a week after Turkey dismissed two of its central bank deputy governors and another high-level official.
Suggestions that some of the three policymakers opposed last month’s rate cut were dismissed by CBRT Governor Şahap Kavcıoğlu, who said that they left either of their own choice or because the bank wanted it.
Kavcıoğlu said people were making wrong assumptions about the removal of the MPC members and that there were no problems at the central bank.
After the policy meeting, the bank said the recent increase in inflation has been driven by supply-side factors such as a rise in food and import prices, especially in energy, and supply constraints, an increase in administered prices and demand developments due to the reopening.
It noted that "supply-side transitory factors leave limited room for a downward adjustment to the policy rate until the end of the year."
The monetary tightening had a decelerating impact on credit and domestic demand, the bank said, adding the tight monetary stance has a higher-than-envisaged contractionary effect on commercial loans.
In addition, a strengthened macroprudential policy framework has started to curb personal loan growth, it stressed.
After the MPC evaluated the analyses regarding decomposing the impact of demand factors that can be affected by monetary policy, core inflation developments and supply shocks, it decided a cut in interest rate, the statement read.
Annual headline inflation rose to 19.58% last month. The core “C” measure – which the central bank has been stressing lately – rose to near 17%.
The median estimate of 13 economists who participated in the Reuters poll for the policy rate at year-end stood at 16.5%, with forecasts ranging between 17% and 16%. The median in the AA survey for the year-end policy rate stands at 17%.
The central bank forecast inflation would hit 14.1% by the end of the year.
The country’s medium-term economic program, announced last month, expects it to fall to 16.2% by the end of the year and hit 9.8% by the end of 2022.
