The Central Bank of the Republic of Turkey's (CBRT) cut its one-week repo auction rate to 10.75 percent and it has now been cut six times and by a total of 13.25 percentage points since July 2019.
It is CBRT's second rate cut this year, with the size of the cut smaller than the 75 basis point cut in January, a 200 point cut in December 2019, a 325 point cut in September, and a 425 point cut in July.
Reflecting the smaller size of today's rate cut, CBRT's monetary policy committee said it was "a more measured cut" in light of the inflation outlook.
In January CBRT described its cut as "measured."
CBRT reiterated that keeping the process of disinflation on track requires a continued "cautious" monetary stance and this stance would be determined by the trend of underlying inflation.
Despite a rise in inflation in the last three months, CBRT said an improvement in "macroeconomic indicators, inflation in particular, supports the fall in country risk premium and helps contain cost pressures."
It added inflation expectations, domestic demand and producer prices had contributed to a mild trend in core inflation indicators.
After falling to 8.55 percent in October last year, Turkey's headline inflation rate has been rising in recent months and rose to a higher-than-expected 12.15 percent in January from 11.8 percent in December.
Core inflation, which excludes volatile items such as energy, food, some beverages, tobacco and gold, rose to 9.88 percent in January from 9.81 percent in December and 9.25 percent in November.
CBRT has said it expects inflation to remain elevated in the first quarter of this year around 11.5 percent and then start decelerating in the second quarter and drop to single digits in the second half of the year.
In its latest quarterly inflation report from January, CBRT maintained its forecast for inflation in 2020 of 8.2 percent, falling to 5.4 percent by the end of 2021.
After rising from May to mid-August 2019, the Turkish lira has resumed its decade-long downtrend and weakened further to 6.075 to the U.S. dollar after the rate cut to be down 2 percent since the start of this year - partly in response to escalation of violence in Syria - and down 13 percent since the start of 2019.
Turkey's lira has suffered several bouts of dramatic falls in value in recent years, including the fallout from an attempted coup in 2016 and then a financial crises in 2018, partly in response to President Recep Tayyip Erdogan's firmer grip on power and unusual views on interest rates.
In 2018 the central bank responded to a 30 percent plunge in the lira in July and August by raising its rate by 16 percentage points to push down inflation, raising the ire of Erdogan who believes high interest rates lead to higher inflation.
To ensure inflation would decelerate from a high of over 25 percent in October 2018 and protect the exchange rate of the lira, CBRT maintained its rate at 24.0 percent despite Erdogan's frequent pressure to lower them.
By June 2019 Erdogan had run out of patience and in July he fired the governor, Murat Cetinkaya, for failing to cut rates, the first time a governor had been dismissed since a 1980 military coup.
Ironically, Cetinkaya's dismissal came just as analysts were starting to pencil in rate cuts as inflation was finally declining. Erdogan replaced Cetinkaya with the current governor, Murat Uysal.
Last week Erdogan told lawmakers in the parliament the trend of falling interest rates in Turkey would continue and he was hopeful inflation would be below the government's end-year target of 8.5 percent.
After shrinking on an annual basis for three quarters, Turkey's economy expanded by 0.9 percent in the third quarter of 2019 and CBRT said "recent data indicator that recovery in economic activity continues," and the recovery should be sustained with the help of the ongoing disinflation and improved financial conditions.
However, it also said investment and employment remain weak, and the weaker global economic outlook tempers external demand despite the favorable effects of an improved competitiveness.
The Central Bank of the Republic of Turkey released the following statement from its monetary policy committee:
"Participating Committee Members
Murat Uysal (Governor), Murat Çetinkaya, Ömer Duman, Uğur Namık Küçük, Oğuzhan Özbaş, Emrah Şener, Abdullah Yavaş.
The Monetary Policy Committee (the Committee) has decided to reduce the policy rate (one-week repo auction rate) from 11.25 percent to 10.75 percent.
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 favorable 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.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."
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