The Central Bank of the Republic of Turkey lowered its key interest rate by 50 basis points to 10.75% from 11.25% as expected on Wednesday, its sixth consecutive rate cut and the smallest so far in an aggressive easing cycle designed to boost economic growth.
The Monetary Policy Committee (MPC) has slashed the benchmark one-week repo rate by 1,325 basis points since it kicked off an easing cycle in its monetary policy in July last year, after having raised the key rate to 24% in September 2018 in the face of rising inflation.
In a statement after its monetary policy meeting, the bank said the cut was justified by a continuing need to strengthen a "recovery in economic activity." Investment and employment were still weak due to poor global conditions, it noted.
"Considering all factors affecting the inflation outlook, the committee decided to take a more measured cut in the policy rate," the bank said. "The course of inflation is considered to be broadly in line with the year-end inflation projection," the bank added.
Touching on global issues, the bank stressed that it is keeping a close eye on protectionism, uncertainty, geopolitical developments and the coronavirus outbreak.
The median forecast in a Reuters poll was for a 50-basis-point cut. A rate increase was not among the forecasts, which ranged from no change to a 75-basis-point cut in the benchmark rate.
Seven out of 21 economists surveyed by Anadolu Agency (AA) expected no change in interest rates, while the remaining 14 economists forecast a drop in the rate, ranging between 25 and 75 basis points.
The Turkish lira weakened to 6.08 against the dollar after the central bank move, compared with 6.05 beforehand.
Speaking to lawmakers from the ruling Justice and Development Party (AK Party) Wednesday in the capital Ankara, President Recep Tayyip Erdoğan said the government maintains its determination to lower interest rates and inflation.
Turkey’s annual inflation rate rose a little more than expected to 12.15% year-on-year in January, increasing from 11.84% in December 2019, according to official data.
The annual inflation rate, which saw a level of over 25% in 2018, dropped gradually throughout 2019, from 20.35% in January to 8.55% in October. It closed the year with 11.84% in December.
The inflation rate is expected to hit 8.5% this year, as laid out in the new economic program for 2020-2022 announced by the government last September.
The CBRT recently reaffirmed its view that inflation will converge gradually this year as it made no changes in its midpoint inflation forecast for the end of this year and next. Policymakers at the bank project inflation at 8.2% in 2020.
Door to additional rate cuts kept open
AA finance analyst and economist Haluk Bürümcekçi said the rate cut came in close to the upper limit of the market expectations, while the swap money market did not price the discount.
Stating that the bank went to a "more restrained" reduction based on the moderate course of the core indicators, Bürümcekçi indicated that the bank repeating the sentence that "the current monetary policy stance maintains its compliance with the targeted disinflation path” means it hasn’t closed the door to additional discounts.
Deniz Yatırm strategist Orkun Gödek indicated that the inflation outlook and course in its expectations will be monitored closely in the near period as 75 basis points have left it to the single-digit policy rate.
Stating that they have not made any revisions in their year-end 10% policy rate estimate Gödek said, "But we find it right to observe possible interaction of the lira performance, which has been closely watched in the recent period, on inflation expectations for a while.”
GMC Investment Research Deputy Director Kudret Ayyıldır also recalled that the 50 basis point reduction was realized in line with the expectations. “While the interest rate cut supports single-digit policy rate, we also forecast a measured interest rate cut in the March meeting,” Ayyıldır noted.
The median estimate for the year-end policy rate stood at 10%, according to the Reuters poll on Monday, with estimates ranging from 12.50% to 9.0%.
The median estimate for the policy rate at year-end in the Reuters poll stood at 10%, with estimates ranging between 12.50% and 9%. Twelve economists participated in the year-end poll.
After holding eight Monetary Policy Committee (MPC) meetings last year, the bank decided to increase the number of meetings to 12 in 2020.
During a financially and economically turbulent period that kicked off in the second half of 2018 and stretched into the first half of 2019, the Turkish economy was battered by currency volatility, high inflation and high-interest rates, resulting in tumbling domestic demand from consumers and investors.
The country’s gross domestic product (GDP) entered a promising era of growth in the third quarter of 2019, taking a turn after three consecutive quarters of contraction.
The economy grew 0.9% year-on-year between July and September of 2019, according to data of the Turkish Statistical Institute (TurkStat). Compared with the second quarter, the Turkish economy expanded by a seasonally and calendar-adjusted 0.4%, its third positive quarter-on-quarter in a row, TurkStat data showed.
In the first two quarters, the economy contracted 2.3% and 1.6%, respectively, on an annual basis. In 2018, the economy posted an annual growth rate of 2.8%, narrowing in the last quarter.
The common market expectation for the fourth quarter estimates ranges from 4.5% to 5%. While the government forecasts a 0.5% annual growth for the whole of 2019, its New Economic Program (NEP) targets a 5% annual growth rate for 2020, 2021 and 2022.
“We will continue to implement our growth model based on added value, production, exports and employment. All indicators show we will have closed 2019 with positive growth,” Erdoğan said Wednesday.
He noted Turkey’s economic activity will hopefully grow more than the targeted 5% in 2020.
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