Turkey: Central Bank cuts policy rate and introduces new liquidity measures in emergency meeting in March
The Central Bank moved forward its scheduled meeting by two days to 17 March in response to the coronavirus outbreak. At the meeting, the Monetary Policy Committee lowered the one-week repo rate by one percentage point, from 10.75% to 9.75%—the lowest level since May 2018 and bringing real interest rates deeper into negative territory.
The decision to cut the rate was driven by greater downside risks to the Bank’s year-end inflation expectations stemming from the steep drop in crude oil and metal prices, as well as the bleak global economic backdrop amid the coronavirus pandemic. The Bank stressed that “it is of crucial importance to ensure the healthy functioning of financial markets, the credit channel and firms’ cash flows.” To that end, in addition to cutting the one-week repo rate the Bank also announced a host of measures to increase liquidity for banks such as lowering the foreign-exchange reserve requirement ratio by 500 basis points for banks that meet the real credit growth conditions; providing additional liquidity facilities to banks to secure credit flow to the private sector; as well as repo auctions with various maturities and alternative arrangements. The CBRT stated it “will provide banks with as much liquidity as they need”.
Regarding the monetary policy outlook, the Bank reiterated its previous guidance that a cautious stance is needed to keep inflation on a downward trajectory in line with its year-end expectation of 8.2%.
The next Monetary Policy Committee meeting is scheduled for 22 April.
Commenting on the surprise meeting and decision, analysts at Goldman Sachs stated that “it is quite likely that at least the majority of state owned banks will pass this lower cost on to their borrowers. Given that the 100bp cut […] was 75bp greater than what we expected for [19 March], we lower our interest rate forecast trajectory by this amount. Hence, we now see rates reaching 9% in the next meeting.”
Yarkin Cebeci, an economist at JPMorgan, expects the Central Bank to be more aggressive in the remainder of the year, commenting: “We see a cumulative 175bp in cuts until the end of the year with the first 75bp cut to be delivered in April.” However, Cebeci went on to highlight the uncertain outlook, stating: “A sharp weakening in investor sentiment and a fall in lira demand (especially by local investors) could lead to a more cautious approach while a sharper plunge in economic activity and faster pace of global monetary easing could encourage the CBRT to deliver more.”