Turkey’s central bank cut its key interest rate for the fifth time this year and for the ninth time since July last year, saying economic activity showed signs of bottoming in the first half of May after the government began to normalize the economy from measures to contain the coronavirus while inflation is in line with projections.
The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, the one-week repo rate, by another 50 basis points to 8.25 percent and has now cut it by 375 points this year following cuts in every month since the start of the year.
Since July 2019, when Murat Uysal was installed as new governor of the central bank, rates have been cut 15.75 percentage points.
The rate cut was in line with expectations.
As in recent months, CBRT said maintaining a sustained process of disinflation requires a “cautious monetary stance” and this stance will be determined by considering the trend of underlying inflation.
Turkey’s inflation rate eased to 10.94 percent in April from 11.86 percent in March despite the recent depreciation of the Turkish lira, which hit new record lows two weeks ago.
But the decline in international commodity prices, especially oil and metals, had countered some of the upward pressure on inflation from the lower lira and the disinflationary effects of lower demand was estimated to have increased, CBRT said.
Although consumer prices might rise in the short term due to seasonal and pandemic-related effects on food prices, the disinflationary effects of lower demand will become more prevalent in the second half of the year, it added.
“Accordingly, considering all factors affecting the inflation outlook, the Committee decided to make a measured cut in the policy rate,” the central bank said, adding the outlook for inflation was in line with its projections for the end of the year.
Last month CBRT lowered its forecast for inflation to end this year at 7.4 percent from an earlier forecast of 8.2 percent, and then to fall further to 5.4 percent by the end of 2021 before stabilizing around the 5.0 percent target in the medium term.
Turkey’s lira hit a new record low of almost 7.3 to the U.S. dollar on May 7 but has since firmed over optimism the central bank will be able to agree on a swap line with the U.S. Federal Reserve to ensure dollar funding to meet its debt service obligations.
Today the lira was trading at 6.79 to the dollar, up 7 percent since the low on May 7 but down 12.4 percent since the start of this year and down 22 percent since the start of 2019.
Economic activity in Turkey was following an upward trend in the first two months of the year but then began to weaken by mid-March due to the impact of the COVID-19 pandemic on trade, tourism and domestic demand.
CBRT said high-frequency indicators showed signs of bottoming-out in the first half of May and despite the fall in tourism and exports, the current account is expected to follow what is said was a “moderate course” this year due to the restraining effects of commodity prices and imports.
The Central Bank of the Republic of Turkey issued the following press release:
“Participating Committee Members
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