Turkey cuts rates, defies inflation
TURKEY’S central bank has cut its main interest rate by 25 basis points, defying a sharp jump in inflation following the failed July 15 coup.
The central bank said the overnight lending rate was trimmed to 8.5 percent from 8.75pc and its one-week repurchasing rate remained at 7.5pc.
The overnight borrowing rate also remained intact at 7.25pc.
The cut was the fifth-straight trimming by the central bank under new governor Murat Cetinkaya amid strong pressure from President Recep Tayyip Erdogan for a more dovish monetary policy to stimulate growth.
However, inflation had ticked up to 8.79pc in July compared with 7.64pc in June, with the effects of the coup in particular putting pressure on food prices.
But justifying its decision, the bank said, “Processed food prices, which have shown marked increases, are projected to display a downward correction in the short term. The core inflation trend is expected to improve gradually.”
Despite a decline in tourism revenues due to the coup and a slew of militant attacks, it said that activity showed a “moderate and stable course of growth”.
While inflation remains high, the bank has also been gladdened to see a rally of the Turkish lira which had crashed against the dollar in the wake of the coup but has rallied over 4 percent in the last month.
But some economists expressed concern about the cut, saying that the bank needed to pay far greater attention to inflation.
The cut “provides further evidence that the council is paying scant regard to its inflation target”, said William Jackson of Capital Economics.
He said the bank’s “relentlessly dovish stance” suggests further rate cuts totalling 50 basis cuts were in the offing before the end of the year.
“The council appears to be underestimating the risks facing the Turkish economy,” he added, projecting inflation to shoot up to 10pc by the end of the year despite the bank’s optimism that it would fall. –