NEWS Finance        19/02/2020

Turkish Central Bank reduces interest rate by 50 basis points to 10.75%

The Turkish Central Bank, in its monetary policy committee meeting, has reduced its one-week repo policy rate by 50 basis points from 11.25% to 10.75%.


This decision follows the rate cut of 425 basis points on 25.07.2019 from 24% to 19.75%, the rate cut of 325 basis points on 12.09.2019 from 19.75% to 16.50%, the rate cut of 250 basis points on 24.10.2019 from 16.50% to 14%, the rate cut of 200 basis points on 12.12.2019 from 14% to 12%, and the rate cut of 75 basis points on 16.01.2020 from 12% to 11.25%,


The markets have responded calmly to this further interest rate cut and the Turkish lira has remained steady against the US dollar.


The rate cut was above market expectations which expected the Turkish Central Bank to leave its interest rate unchanged. This policy stimulus, which is a continuation of the rate cuts implemented since July of 2019 when the interest rate was 24%, shows the Turkish government’s determination to boost growth, lift Turkey's economy from recession, and help reduce Turkey's high unemployment rate, at the risk of creating imbalances in the economy. The new policy rate of 10.75% is now well under half of what it was 6 months ago, and is 1.4 percentage points below the January 2020 annual inflation rate of 12.15%. The Turkish Central Bank had justified the reduction in the interest rate on the improving inflation indicators, and also on other generally improving financial indicators, such as the recent current account surpluses and the stable Turkish lira. However, the current account balance has moved back into deficit over the last two months and the Turkish lira is starting to look volatile in face of the looming crisis in Idlib, Syria.   


The Turkish Central bank gave the following press release on its website relating to its interest rate cut decision:


“Recent data indicate that recovery in economic activity continues. Sectoral diffusion of economic activity continues to improve. Despite signs of recovery, investment and employment remain weak. While favourable effects of improved competitiveness prevail, weakening global economic outlook tempers external demand. As the contribution of net exports to economic growth declines, economic recovery is expected to be sustained with the help of the ongoing disinflation process and improvement in financial conditions. Nevertheless, developments in credit growth and its composition are closely monitored for their impact on external balance and inflation. Going forward, sustaining a moderate course in current account balance, which has recently recorded significant improvement, is considered as a crucial element of the macroeconomic policy mix.


Weakness in global economic activity and low levels of global inflation strengthen expectations regarding the continuation of expansionary monetary policies in advanced economies. On the other hand, recently elevated uncertainties regarding global economic outlook lead to volatility in the demand for emerging market assets and the risk appetite. Rising protectionism, uncertainty regarding global economic policies, geopolitical developments and the recent outbreak of an epidemic disease are closely monitored for their impact on capital flows, international trade and commodity prices.


Developments in inflation expectations, domestic demand conditions and producer prices have contributed to a mild trend in core inflation indicators. The improvement in macroeconomic indicators, inflation in particular, supports the fall in country risk premium and helps contain cost pressures. The course of inflation is considered to be broadly in line with the year-end inflation projection. Accordingly, considering all factors affecting the inflation outlook, the Committee decided to make a more measured cut in the policy rate. At this point, the current monetary policy stance remains consistent with the projected disinflation path.


The Committee assesses that maintaining a sustained disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, monetary stance will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.”

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