The Turkish Central Bank, in its monetary policy committee meeting, has reduced its one-week repo policy rate by 425 basis points from 24% to 19.75%.
This decision marked the biggest rate cut since 2002 and the first rate cut in 4.5 years. It also came after the bank's new governor, former deputy Murat Uysal, took the reins after former Governor Murat Çetinkaya was removed from duty over an apparent clash with the government on the rate cut.
The initial response of markets to the bold rate cut seemed positive as Turkish lira remained firm against U.S. dollar and euro, briefly shedding 0.5% in value before gaining 0.5%.
Economists had expected a median cut of 250 basis points, or 2.5 percentage points, according to a Reuters poll last week that showed a wide range of views. The policy stimulus could help lift Turkey's economy from recession, help reduce Turkey's high unemployment rate and relieve borrowers facing some of the highest real interest rates in the world's emerging markets. In 2018, the interest rate climbed from 8% to 24% over the course of the year as a result of a volatile Turkish lira which devalued almost 40% against the dollar in 2018.
The Turkish Central Bank gave the following statement on its website relating to its interest rate cut:
“The Monetary Policy Committee (the Committee) has decided to reduce the policy rate (one-week repo auction rate) from 24 percent to 19.75 percent.
Recently released data indicate a moderate recovery in the economic activity. Goods and services exports continue to display an upward trend despite the weakening in the global economic outlook, indicating improved competitiveness. In particular, strong tourism revenues support the economic activity through direct and indirect channels. Looking forward, net exports are expected to contribute to the economic growth and the gradual recovery is likely to continue with the help of the disinflation trend and the partial improvement in financial conditions. The composition of growth is having a positive impact on the external balance. Current account balance is expected to maintain its improving trend.
Recently, weaker global economic activity and heightened downside risks to inflation have strengthened the possibility that advanced economy central banks will take expansionary monetary policy steps. While these developments support the demand for emerging market assets and the risk appetite, rising protectionism and uncertainty regarding global economic policies are closely monitored in terms of their impact on both capital flows and international trade.
Inflation outlook continued to improve. In the second quarter, inflation displayed a significant fall with the contribution from a deceleration in unprocessed food and energy prices. Domestic demand conditions and the tight monetary policy continue to support disinflation. Underlying trend indicators, supply side factors, and import prices lead to an improvement in the inflation outlook. In light of these developments, recent forecast revisions suggest that inflation is likely to materialize slightly below the projections of the April Inflation Report by the end of the year. Accordingly, considering all the factors affecting inflation outlook, the Committee decided to reduce the policy rate by 425 basis points.
The Committee assesses that maintaining a sustained disinflation process is the key for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, the extent of the monetary tightness will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.”