The Central Bank of the Republic of Turkey (CBRT) unexpectedly halted a nearly yearlong easing cycle on Thursday by keeping its key interest rate unchanged at 8.25% and citing upward pressure on inflation due to the coronavirus pandemic.
The bank had cut its one-week repo rate by 1,575 basis points in nine consecutive meetings since July last year, when it stood at 24%, in a muscular bid to stimulate the economy and more recently to counter the economic downturn brought on by the coronavirus outbreak.
"As developments regarding the spread of the coronavirus substantially weakened global growth in the second quarter, normalization steps taken by several countries have contributed to a partial recovery," a statement from the bank's sixth meeting of the Monetary Policy Committee (MPC) said.
The MPC cited an increase in core inflation and said food prices have risen because of seasonal factors and the coronavirus pandemic, adding the “economic recovery has started as of May.”
The Turkish lira initially jumped when the bank did not trim rates by 25 basis points as expected. Economists polled by Reuters and Anadolu Agency (AA) expected the policy rate to drop to 8%.
The statement stressed that central banks continue to take expansionary measures while uncertainties remain high on the global economy.
"The pandemic disease is closely monitored for its evolving global impact on capital flows, financial conditions, international trade and commodity prices," it added.
It also said with the normalization steps as of May, economic recovery has started, and noted that it is important to ensure the healthy functioning of financial markets, the credit channel and firms' cash flows.
"In this respect, recent monetary and fiscal measures contribute to financial stability and economic recovery by supporting the potential output of the economy," it underlined.
Touching on decreasing exports and tourism revenues, it recalled that exports recovered in the ongoing normalization process.
With the outbreak hitting domestic demand, tourism and exports, the bank last month lowered its inflation forecast for end-2020 to 7.4% from 8.2%.
In the statement on Thursday, the MPC said it expects the effect of the pandemic on the supply side to fade while “demand-driven disinflationary effects will become more prevalent in the second half of the year.”
Plummeting global oil prices have pushed inflation down in energy import-dependent Turkey. The inflation climbed more than expected to 11.39% year-on-year in May, according to Turkish Statistical Institute (TurkStat) data. May's annual inflation was up from 10.94% in April. Month-on-month, consumer prices rose 1.36% in May.
Economists expect the policy rate at year-end to stand at 7.75%, down from 8% last month, with forecasts ranging between 8% and 7.25%.