Turkey cuts rate 6th time as inflation largely as forecast

     Turkey's central bank lowered its policy rate by another 50 basis points, the smallest cut in the current easing cycle, and said the path of inflation is broadly in line with its forecast and the current monetary policy stance is consistent with this path.
     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