Improvement in inflation expectations continues, central bank says

Inflation expectations continue to improve and are broadly in line with the central bank's projection of 8.2% by year-end, the Central Bank of the Republic of Turkey (CBRT) said Thursday.

In the minutes of its policy meeting last week, released Thursday, the bank said its own policy will depend on further disinflation.

The bank cut its key interest rate to 11.25% earlier this month from 24% since July 2019 on the back of stabilizing lira and a drop in inflation, which was 11.8% in December.

Last year, it held eight monetary policy meetings, as interest rates fell by 1,200 basis points over the course of the year, from 24%. The bank scheduled 12 committee meetings for 2020.

Inflation has been a pressing issue for the economy since the second half of 2018, when it surged to almost 25.24% in October as steep depreciation in the Turkish lira pushed up the price of imported goods.

The inflation rate in December came in at 11.84%. Turkey was expected to close 2019 with inflation at around 12%, as laid out in the New Economic Program (NEP) for 2020-2022 announced by the government in September 2019. The program forecasts inflation to stand at 8.5% in 2020, 6.0% in 2021 and 4.9% in 2022.

Turkish policymakers must keep a lid on financial volatility and deliver predictable fiscal policies to keep the economic recovery on track, the bank said.

To "minimize a likely inflation-growth trade-off, it will be crucial that macro-financial policies (reduce) financial volatility ... and that the predictability of the fiscal policy continues to be reinforced," it added.

While the bank has said it has less room to continue easing policy, analysts expect it to cut rates a little more in the coming months.

"Keeping the disinflation process on track with the targeted path requires the continuation of a cautious monetary stance," the bank said in the minutes. Policies will hinge on "indicators of the underlying inflation trend to ensure the continuation of the disinflation process," it added.