Central bank expected to cut rates by at least 250 basis points

Published 12.09.2019 00:22

After a major interest rate cut of 4.25% at the last meeting in late July, the central bank is scheduled to meet today and announce another rate cut per expectations.

Some foreign economists expect that the Central Bank of Republic of Turkey (CBRT) will cut interest rates by about 250 to 300 basis points. The performance of the Turkish lira against the U.S. dollar and the decline in inflation are among the important factors that will allow the CBRT to cut interest rates, analysts said, pointing out that the policy rate maybe pulled down to a lower level towards the end of the year.

In a statement to Anadolu Agency (AA), Medel Global Advisors Director Nigel Rendell predicted that the CBRT could cut the policy rate by 300 basis points from 19.75% to 16.75% at the Monetary Policy Committee Meeting this week.

Rendell said the CBRT could implement an expansionary monetary policy due to the stability of the Turkish lira and the decrease in inflation, adding that inflation could fall for the next few months.

Rendell said headline inflation could see single digits in September or October, stressing that real interest rates might go down to near-zero levels by the end of the year, meaning that policy rates might fall to 13-14% levels.

Capital Economics Emerging Markets Senior Economist Jason Tuvey, on the other hand, envisaged that the CBRT would cut the policy rate by 250 basis points from 19.75% to 17.25%.

Societe Generale Emerging Markets Strategy Director Phoenix Kalen said the CBRT could cut its policy rate by 250 basis points to 17.25%.

Kalen said real interest rates could be lowered to 2-3%. "If the CBRT's year-end CPI (consumer price index) forecast of 13.96% is realized, the real interest rate of 2-3% may mean a 15.9-16.9% policy rate at the end of the year," Kalen added.

Kalen further noted that markets expect a reduction of 200-270 basis points at this week's meeting, predicting that the CBRT could cut the policy rate by a total of 285-385 basis points by the end of the year.

Tacirler Yatırım Research Director Özlem Bayraktar Gökçen also echoed mainstream expectations and said the bank will reduce interest rates by 250 basis points and emphasized that the rate cuts are likely to continue in the remaining part of the year. The central bank will close the year with an interest rate of 15.5%, she said.

İş Yatırım Securities Research Director Muammer Kömürcüoğlu also indicated that today's meeting will decide on a 250 basis point rate cut and the remaining monetary policy meetings will also announce 200 basis point rate cuts. He explained that the positive trend in inflation and the possibility of further downward movement in inflationary pressures give the central bank the upper hand in cutting the rates and loosening monetary policy.

Persistent inflationary pressures on the Turkish economy have finally signaled a sigh of relief as annual inflation slipped to 15.01% in August, according to the Turkish Statistical Institute (TurkStat).

The downward trend in inflation, falling market interest rates and the ameliorating industrial output are all coming to support a slight loosening of monetary policy, which in Turkey is one of the pillars of economic growth.

In July, the CBRT cut its year-end inflation forecast for 2019 to 13.9%, down from 14.6% in its previous report. The rate is expected to fluctuate between 11.5% and 16.3% through the end of this year, the bank's governor Murat Uysal said.

In the face of rising inflation, which peaked in October 2018 at 25.24%, the CBRT increased interest rates to 24% in September 2018, from 17.75% at the time. However, in its July meeting, the bank cut rates massively by 425 basis points to 19.75%.

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