Türkiye’s central bank surprised markets again on Thursday as it eased its monetary policy further by slashing its benchmark policy rate for the second consecutive month.
The Central Bank of the Republic of Türkiye (CBRT) cited continued indications of an economic slowdown in the third quarter as it lowered its one-week repo rate to 12% from 13%.
In a statement accompanying the decision, the bank’s Monetary Policy Committee (MPC) repeated it expected disinflation to start. Türkiye’s annual consumer price index (CPI) rose to a fresh 24-year high in August.
The statement reflected the bank’s remarks from last month when it also pointed to a loss of economic momentum, as it surprised markets with a 100-basis-point cut from 14%. It had left the rate steady the previous seven months.
"Leading indicators for the third quarter continue pointing to loss of momentum in economic activity due to the decreasing foreign demand," the MPC said.
It said that financial conditions must remain supportive "to preserve the growth momentum in industrial production and the positive trend in employment," pointing to increasing uncertainties in global growth and escalating geopolitical risk.
Turkish lira touched a record 18.42 versus the United States dollar following the decision, surpassing the level reached in December. It edged back to 18.38 by 11:25 a.m. GMT.
Annual inflation topped 80% in August but the increase turned out to be smaller than in previous months, signaling that price pressure might be slowing.
The central bank attributed surging consumer prices to external factors such as the global jump in the price of energy and food caused by Russia’s invasion of Ukraine.
Surveys mostly expected the bank to keep the benchmark rate at 13%, with a small number of those estimating a cut.
Eleven of 14 economists that participated in a Reuters poll for Thursday’s rate decision predicted that the central bank would leave the one-week repo rate unchanged. One predicted a 50-basis-point cut to 12.50%, while two forecast a 100-basis-point cut to 12%.
Most economists surveyed by Bloomberg also predicted the benchmark would stay at 13%, while a minority that included Morgan Stanley, UniCredit SpA and Citigroup Inc. expected the MPC to lower it again, with forecasts ranging from 50 basis points to a full percentage point.
The government says inflation will fall with its economic program prioritizing exports, production and investments, aiming to lower the increase in consumer prices by flipping Türkiye’s chronic current account deficits to a surplus.
President Recep Tayyip Erdoğan on Monday said inflation is not an "insurmountable economic threat," adding it will begin to fall at the end of the year.
Türkiye is almost completely dependent on imports to cover its energy needs, which leaves it vulnerable to rising costs that skyrocketed following Russia’s invasion of Ukraine, and domestic demand has risen since the pandemic.
"For us, inflation is a problem at the moment, but after the beginning of the year, we will overcome this problem and we will continue our way with determination," Erdoğan said.
The president earlier said that he expects inflation to come down to "appropriate" levels by February-March next year and asked the public to be patient.
Finance Minister Nureddin Nebati has also said the inflation rate would enter a sharp downward trend as of December due to favorable so-called base effects and the fall will continue throughout 2023.
The government sees inflation falling to 65% by the end of the year and 24.9% by the end of 2023.
The Central Bank of the Republic of Türkiye (CBRT) last month raised its year-end inflation forecast to 60.4% and saw it peaking near 90% in the autumn.
Since last month’s cut, the central bank has taken steps that are meant to address the widening gap between the bank’s policy rate and lending rates. One move was mandating banks to hold bonds for loans with interest rates above a certain level.