Turkish Central Bank Announces 6th Consecutive Rate Cut

Turkish Central Bank Announces 6th Consecutive Rate Cut
February 20, 2020

 

The greenback rose against the Turkish lira after the Central Bank of Turkey (Türkiye Cumhuriyet Merkez Bankası or TCMB) slashed interest rates for the sixth successive time, pointing to a rebound in economic activity and the necessity to maintain a disinflation path. The lira lost 0.3% to trade at 6.0821 per dollar, a level seen last May. Notably, the currency plunged by 28% in 2018, when a currency crisis ruined financial markets and economic activity.

TCMB Governor Murat Uysal, who led the Monetary Policy Committee, trimmed the policy rate to 10.75% from 11.25%. The policy rate is the one-week repo auction rate. The recent cut was the smallest in the ongoing easing phase. Last month, the bank had slashed the interest rate by 75 basis points.

The Turkish central bank had trimmed the rate by 200 basis points in the earlier policy session in December. Earlier to that, the rate was slashed by 250 basis points in October, 325 basis points in September, and by 425 basis points in July. A survey conducted by an agency in Anadolu had predicted a 25-75 basis points rate cut. Along with the rate cut, the central bank had scheduled 12 committee meetings for this year. In 2019, the central bank conducted eight monetary policy committee (MPC) meetings as interest rates declined 1,200 basis points during that year, from 24% to 12%.

The central explained the reason behind the small rate cut: “Considering all factors affecting the inflation outlook, the Committee decided to make a more measured cut in the policy rate. At this point, the current monetary policy stance remains consistent with the projected disinflation path.”

The bank opined that economic activity continues to improve. However, it acknowledged that investment and employment remain weak. “Despite signs of recovery, investment and employment remain weak. While favorable effects of improved competitiveness prevail, weakening global economic outlook tempers external demand.”

For 2020, the bank anticipates an inflation rate of 8.2%, while the latest economic plan aims for 8.5%. Turkish Statistical Institute had reported the country’s inflation rate to be 12.15% in January.

Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London, believes that the ongoing rate cut cycle is far from over. Ash said, “The rate-cutting cycle is relentless and the lira is just going to have to get used to that and adjust.”

As an integral part of the macroeconomic strategy, the bank aims to maintain a medium path in the current account balance, which has lately seen considerable progress. Growing ultra-nationalism, protectionism, vague economic policies, and coronavirus (Covid-19) outbreak in China are closely watched by the central bank to assess the potential impact on capital inflows, global trade, and commodity prices.

In the US, a document published by the Labor Department indicated that the producer prices increased greater-than-anticipated in January. According to the statistical organization, the producer price index for final demand rose by 0.5% m-o-m in January, after increasing by 0.2% in the earlier month. Economists had anticipated producer prices to edge up by 0.1%. An increase in the costs of healthcare, hotel accommodation, and other services caused an increase in producer prices. It is the largest increase since October 2018, after edging up by 0.2% in December.

On a y-o-y basis, the PPI advanced 2.1%, the steepest rise since May, after increasing 1.3% in December. Economists surveyed by Reuters had forecast the PPI to increase by 1.6% on a y-o-y basis.

Core producer prices increased by 1.7% in January, reflecting a considerable rise from the 1.1% increase in the earlier month.

Based on PPI data, Michael Pearce, Senior U.S. Economist at Capital Economics, opined that there is little chance for the interest rate to change in the years to come. Pearce said: “The jump in Medicare hospital payments will feed through into the Fed’s preferred PCE consumer price measure, but it should still remain well below the 2% target, which means that interest rates are going to remain at or below current levels for many years to come.”

The interest rate cut is expected to keep the lira weak against the US dollar in the days ahead.

Technically, the USD/TRY pair has broken the resistance at 6.070. Therefore, we can expect the currency pair to stay bullish in the near-term.

try - technical analysis - 20th Feb 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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