Turkey: Central Bank aggressively cuts rates again in September; further cuts likely to be more gradual
At its 12 September Monetary Policy Committee (MPC) meeting, the Central Bank of Turkey chopped the one-week repo rate by 325 basis points—overshooting market expectations of a 250 basis-point cut—bringing the policy rate down to 16.50% from 19.75%.
The decision to aggressively cut the interest rate again, after the one-week repo rate was cut by 425 basis points in July, was driven by an improving inflation outlook. The recent disinflationary path has been buttressed by a relatively stable Turkish currency, improving inflation expectations and frail domestic demand. Based on those developments, the Bank noted that it expects inflation this year to come in slightly below the July projection of 13.9%.
In the accompanying press release, the Central Bank largely struck a similar tone to its last meeting and stated that keeping the disinflation process on track “requires the continuation of a cautious monetary stance”. However, it also stated that “at this point, the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path.” As such, further rate cuts are not necessarily a forgone conclusion, but should be more gradual.
The research team at Goldman Sachs noted that the last statement reduced market fears of more aggressive rate cuts, stating that “the decision appears to have surprised the market to the hawkish side, given that the TRY strengthened on impact [as the fears of further large rate cuts] now seem to have declined.”
Muhammet Mercan, chief Turkey economist at ING, stated that the Central Bank of Turkey clearly felt confident about the strength of the disinflationary process. However, Mercan noted that the Bank should move ahead with caution given that inflation expectations are not well anchored, future economic policy remains uncertain, geopolitical risks linger and dollarization is high.