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Turkey Monetary Policy May 2020

Turkey: Central Bank slashes its policy rate again in May

The Central Bank once again cut the one-week repo rate at its 21 May meeting, this time by 50 basis points to bring the rate down to 8.25%—the lowest it has been in two years, since before the country’s 2018 currency crisis. The decision was in line with market expectations.

The latest rate movement was likely driven by a desire to support the economy ahead. The Bank stated that “it is of crucial importance to ensure the healthy functioning of financial markets, the credit channel and firms’ cash flows” and that the “recent monetary and fiscal measures will contribute to financial stability and post-pandemic recovery”. Activity has weakened since mid-March on the back of restrictive measures imposed by the government to curb the spread of Covid-19, while the pandemic has also weighed on trade and tourism. That said, the Bank noted a bottoming out of the economic downturn in early May due to the lifting of some restrictions.

Meanwhile, the return of deflationary forces due to low commodity prices—particularly oil prices—as well as faltering aggregate demand provided the Bank some room to cut its rate, despite the depreciation of the Turkish lira. Moreover, the Bank expects disinflationary pressure to persist going forward. As such, the Bank noted that “under the current monetary policy stance, inflation is considered to be in line with the year-end inflation projection.” However, the latest decision brings real interest rates deeper into negative territory, which could lead to intensifying price pressures through further lira weakening, as holding lira-denominated assets becomes less attractive.

In its press release, the Central Bank struck a relatively unchanged tone, highlighting the importance of a “cautious” monetary stance. On balance our panelists see some further slight loosening later this year.

The next Monetary Policy Committee meeting is scheduled for 25 June.

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