Turkey: Central Bank cuts policy rate by more than expected in April amid a more favorable inflation outlook
The Central Bank delivered a larger-than-expected rate cut at its 22 April meeting, slashing the one-week repo rate by 100 basis points to 8.75% from 9.75%. The decision was taken in a bid to protect the economy against the Covid-19 pandemic that will weigh heavily on the country’s economic prospects this year by depressing trade, manufacturing and tourism. Furthermore, real interest rates are now among the lowest in the world.
The decision to once again cut the interest rate was driven by downside risks to the Bank’s year-end inflation expectations. These downside risks emanate from the health crisis as the pandemic weighs on trade, tourism and domestic demand, thereby depressing aggregate demand and, subsequently, price pressures. Moreover, the Bank cited the sharp drop in international commodity prices as additional downward pressures on inflation, despite the ongoing slide of the Turkish lira. On 22 April, the lira depreciated 6.1% month-on-month against the USD and weakened 14.8% against the greenback year-to-date.
The Central Bank’s response to stimulate the economy risks weakening the currency even further and, in its press release, the Monetary Policy Committee reiterated that a cautious stance is needed to keep inflation on a downward trajectory.
The next Monetary Policy Committee meeting is scheduled for 21 May.