Turkey: Central Bank cuts policy rate more than expected in July
In the first meeting since the sacking of former governor Murat Cetinkaya on 6 July, the Monetary Policy Committee (MPC) slashed the one-week repo rate from 24.00% to 19.75% on 25 July. The 425-basis point cut overshot market expectations of a 250-basis point cut.
The largest rate cut in nearly two decades was taken on the grounds of an improving inflation outlook—in particular, food and energy price inflation is softening—and still-limp domestic demand. Moreover, the Bank now expects inflation to end the year slightly below its April projection of 14.6%. A new inflation projection is to be released on 31 July. While the Bank made no specific mention of a supportive base effect, last year’s currency-crisis-induced jump in inflation in H2 should support easing inflation in the months ahead.
In the accompanying press release, the Central Bank struck a relatively neutral tone and stated that “keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary policy.” Further rate cuts are therefore not necessarily a forgone conclusion and are likely to be gradual at best.
Yarkin Cebeci, analyst at JPMorgan, stated that the deep cut in July “suggests that the CBRT wanted to take advantage of supportive external conditions and improving price dynamics by front-loaded easing”.
Moreover, Muhammet Mercan, chief economist for Turkey at ING, noted that “the [Central Bank of Turkey] will likely come up with measured moves in the upcoming MPCs as the real policy rate now is less divergent from that of other EM counterparts”. Cebeci concurred that “the next moves will be more cautious.”
Earlier in July, Murat Cetinkaya was relieved of his position one year prior to the end of his term amid reports that he disagreed with President Erdogan on the speed and steepness of an easing cycle. Cetinkaya’s dismissal raises concerns over the Bank’s independence at a time when investors are already jittery over economic and fiscal policy and the erosion of democratic institutions.