Turkey’s central bank opening the way for rate cuts – Capital Economics

The Turkish central bank is paving the way for a reduction in interest rates under new governor Şahap Kavcıoğlu, according to London-based economic research firm Capital Economics.

The central bank is no longer pledging to maintain tight monetary policy decisively, dropping such wording from a statement on Thursday accompanying a decision to keep interest rates at 19 percent. Rather, it said rates would remain above inflation, currently running at 16.2 percent.

“Significant easing still appears to be on the cards” despite the bank’s decision to keep rates on hold, William Jackson, chief emerging markets economist at Capital Economics, said in an e-mailed report on Thursday. “Indeed, the evidence from previous easing cycles suggests that the rate cuts could come once inflation is peaking and the economy is slowing.”

Turkish President Recep Tayyip Erdoğan brought in Kavcıoğlu in mid-March to replace Naci Ağbal, a former finance minister who had raised interest rates from 10.25 percent during his four-month tenure. Two other officials of the seven-member Monetary Policy Committee have also lost their jobs.

Headline inflation will probably dip in the second quarter and should decelerate more substantially later in the year, Jackson said. “What’s more, the (economic activity) outlook for the second quarter has taken a turn for the worse amid a surge in new virus cases.”

The easing cycle may begin in the coming months and accelerate towards the end of 2021, he said.