Turkey: Central Bank cuts policy rate in January for fifth consecutive time
At its 16 January Monetary Policy Committee (MPC), Turkey’s Central Bank slashed its one-week repo rate again, this time by 75 basis points to 11.25%. Market analysts were split ahead of the decision: While a slim majority expected a small rate cut, there was a sizable group of analysts who had expected the Bank to stay on hold. Due to last year’s strong easing cycle, real interest rates have fallen to below zero, when adjusted for inflation, while inflation rose again in the final two months of last year and is expected to remain in double-digit territory this year.
Justifying yet another rate cut, the Bank noted the ongoing “disinflation process” and that the inflation trajectory was “in line with the year-end inflation projection”. Describing its current stance as “consistent with the projected disinflation path”, the MPC thus took a “measured cut”. However, the Bank’s inflation expectation for the end of this year (8.2%) is notably below the FocusEconomics Consensus of 10.2%, while the balance of risks remains tilted to the downside. In addition, although data shows an ongoing recovery in the Turkish economy, investment demand remains weak. The decision to lower the rate was also likely influenced by the government’s priority to stimulate the economy over bringing down inflation.
President Recep Tayyip Erdogan’s desire to support economic growth also likely led to changes to the reserve requirement ratio late last year. On 28 December, the Bank raised the reserve requirement ratios for foreign currency deposits and participation funds by 200 basis points for all maturity brackets, expect for banks that comply with the lira-denominated real loan growth conditions; those banks’ reserve requirement ratios were lowered by 200 basis points.
In its accompanying MPC press release, the Central Bank sounded somewhat less dovish compared to the prior meeting. At its last meeting, the Bank noted that its “current monetary policy stance is considered to be consistent with the projected disinflation path”; this time around, it stated that “keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance”.
The next Monetary Policy Committee meeting is scheduled for 19 February.