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Turkey Monetary Policy October 2019

Turkey: Central Bank cuts rate more than expected in October

Turkey’s Central Bank continued on its monetary policy easing path on 24 October, with the Monetary Policy Committee (MPC) cutting its one-week repo rate by 250 basis points to 14.00% from 16.50%. Consequently, the one-week repo rate has now been cut by 1,000 basis points since Governor Murat Uysal took over the chair on 6 July, after President Erdogan sacked the previous governor, Murat Cetinkaya.

The decision, which surprised market analysts in terms of aggressiveness, was driven by an ongoing improvement in the inflation outlook while economic activity continued to recover moderately. The lingering disinflationary process was supported by a relatively stable currency, although state banks recently intervened to stem a slide; improving inflation expectations, which affects price-setting behavior; and subdued domestic demand conditions. Taking stock of recent developments, the Bank noted that “inflation is likely to materialize notably below the projections of the July Inflation Report by the end of the year.” At the prior policy meeting, the Bank had stated that inflation would only come in “slightly” below its July expectations.

In the accompanying press release, the Central Bank struck a largely similar tone to its previous meeting and noted again that “the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path” and that keeping the process on track “requires the continuation of a cautious monetary stance.”

Assessing the latest decision, Muhammet Mercan, chief economist at ING Turkey, noted:

“In our view, the case for further monetary easing in the last MPC meeting in December has significantly weakened after today’s decision, while any move should take a more gradual pace.”

That said, while the current stance suggests more gradual rate cuts going forward, it is by no means a foregone conclusion that the Bank does not over-deliver again akin to October’s meeting.

The next Monetary Policy Committee meeting is scheduled for 12 December.

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