Big rates cut from Turkish central bank after Ankara agrees to halt Syria operation

(Updates with economist Güldem Atabay’s comments from sixth paragraph)

The Turkish central bank’s Monetary Policy Committee announced on Thursday a large reduction in the policy rate, bringing it from 16.50 percent to 14 percent.

The 250-basis-point cut was larger than most economists expected from the central bank, which had already slashed its benchmark lending rate by 750 basis points to 16.5 percent since July as inflation slowed down to 15 percent from 16.7 percent during the same period.

The committee cited factors affecting the inflation outlook as the reason for the decision to cut one-week repo auction rate in a statement on the central bank’s website. 

“In addition to the stable course of the Turkish lira, improvement in inflation expectations and mild domestic demand conditions supported the disinflation in core indicators,” it said. 

“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 materialise notably below the projections of the July Inflation Report by the end of the year,” the bank said. 

“This is a political decision, rather than an economic one,” said economist and Ahval contributor Güldem Atabay.

The rate cut is larger than expected, and the decision makers are relying on rate cuts from central banks in major economies to boost capital inflows to emerging economies, she said.

Turkish President Recep Tayyip Erdoğan’s deal with Russian President Vladimir Putin to end Turkey’s military offensive in northern Syria strengthened expectations for a new big rate cut, Bloomberg reported on Thursday. 

The Turkish-Russian deal alleviated concerns that the turmoil in northern Syria could halt the slowdown of inflation. U.S. President Donald Trump’s announcement on Wednesday that the United States had lifted sanctions recently imposed on Turkey over Ankara’s military operation in Syria gave the lira another lift, Bloomberg said. 

Atabay said despite the current relief those developments have created, it was more realistic to assume that Turkey’s domestic and foreign policy would remain on shaky grounds in the upcoming months.

“Given that inflation will rise again to double-digit figures in a short time, a 14-percent policy rate with an inflation around 12 to 13 percent will make the Turkish economy more fragile,” she said.

The International Monetary Fund said last month that Turkey’s monetary policymakers should now keep interest rates steady to bolster financial stability.

“The central bank easing cycle has been too aggressive given still-high inflation expectations and the need to mitigate macro-financial risks,” the fund said. “Monetary policy should keep rates on hold until there is a durable downturn in inflation and inflation expectations.”