Turkey’s Central Bank lowers benchmark interest rate to 16.5%

The Central Bank of the Republic of Turkey (CBRT) on Thursday lowered its benchmark interest rate — the one week repo rate — by 325 basis points to 16.50% from 19.75%.

Following the rate cut, which was slightly above market expectations ranging between 250 to 300 basis points, Turkish lira gained 1.5% against the U.S. dollar.

The bank cited “moderate recovery in economic activity” and a “disinflation trend” as the reasons for the rate cut in a statement released after its Monetary Policy Committee meeting.

“The inflation outlook continued to improve. 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.

The Turkish central bank in July slashed its policy rate to 19.75% from 24% in its first policy change since September 2018. Last year, a currency crisis chopped 30% from the value of the lira and sent inflation soaring to a 15-year high above 25%.

A drop this year in inflation cleared the way for easing, and such expectations only grew after Murat Uysal was appointed central bank governor and said there was room to maneuver on policy given the improving trend in prices.

Inflation in Turkey eased slightly more than expected to 15.01% in August from 16.65 percent the previous month, Turkish Statistical Institute (TurkStat) data showed last week, resuming a downward trend.

The Turkish central bank expects year-end inflation at 13.9 percent, citing lower food and import prices.

The Turkish economy contracted for the third consecutive time in the second quarter by 1.5 percent year-on-year, TurkStat data showed this month.

In July, the CBRT cut its year-end inflation forecast for 2019 to 13.9%, down from 14.6% in its previous report. The rate is expected to fluctuate between 11.5% and 16.3% through the end of this year, the bank’s governor Murat Uysal said.

In the face of rising inflation, which peaked in October 2018 at 25.24%, the CBRT increased interest rates to 24% in September 2018, from 17.75% at the time. However, in its July meeting, the bank cut rates massively by 425 basis points to 19.75%.