Central Bank lowers interest rates 425 bps

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The Central Bank of Turkey slashed its policy rate (one-week repo auction rate) by 425 basis points to 19.75 percent from 24 percent.

This marked the first reduction in the interest rate since February 2015 and was well above the market expectations for a rate cut between 200 basis point and 300 basis points.

The Turkish Lira slumped more than 1 percent against the U.S. dollar to trade at 5.73 immediately after the Central Bank announced the rate decision. But the local currency gained ground later to trade at 5.69 per dollar as of 2:30 pm local time. The main stock exchange index, BIST-100, was up around 0.6 percent.

“Recently released data indicate a moderate recovery in the economic activity,” the CentralBank said in a statement released after yesterday’s Monetary Policy Committee meeting, which was chaired for the first time by the newly appointed government Murat Uysal.

Former Governor Murat Çetinkaya was dismissed from his post early on July 6 via a presidential decree, to be replaced by his deputy governor Uysal.

Commenting on the removal of Çetinkaya, President Recep Tayyip Erdogan said on July 9 that the former governor’s decisions had burdensome costs, which were “beyond endurance,” and thus a change was needed.

External balance improving

“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,” the statement added.

According to the Central Bank, net exports will 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 statement noted that the composition of growth is having a positive impact on the external balance and that the country’s current account balance is expected to maintain its improving trend.

The bank also underlined that 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.

“These developments support the demand for emerging market assets and the risk appetite.”

Better inflation outlook

The Central Bank said the inflation outlook continued to improve and that inflation declined significantly in the second quarter thanks to a deceleration in unprocessed food and energy prices.

Domestic demand conditions and the tight monetary policy continue to support disinflation, according to the statement.

“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,” it added.

The bank also vowed to continue to use all available instruments in pursuit of the price stability and financial stability objectives and said that any new data or information may lead the committee to revise its stance.

The MPC will hold three more meetings in the remainder of the year, scheduled for Sep. 12, Oct. 24, and Dec. 12.

Hurriyet Daily News

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