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Turkish Central Bank Cuts Key Rate by 50 Basis Points

Turkish Central Bank Cuts Key Rate by 50 Basis Points

Wednesday, 19 February, 2020 - 11:30
Turkey's central bank lowered its key interest rate by 50 basis points. (Reuters)

Turkey's central bank lowered its key interest rate by 50 basis points to 10.75% as expected on Wednesday, its sixth consecutive rate cut and the smallest so far in an aggressive easing cycle designed to boost economic growth.

The bank cut its benchmark one-week repo rate from 11.25%, pushing real rates deeper into negative territory for locals with lira deposits after year-over-year inflation rose to 12.15% in January.

"Considering all factors affecting the inflation outlook, the Committee decided to make a more measured cut in the policy rate," the bank said in a statement after its monetary policy meeting.

In a Reuters poll, the median forecast was for a 50-basis-point cut. A rate increase was not among the forecasts, which ranged from no change to a 75-basis-point cut in the benchmark rate.

Inflation has dropped from a peak above 25% in the wake of a 2018 currency crisis that cut the Turkish lira's value by nearly 30%. The subsequent brief recession saw economic growth all but disappear in 2019.

The central bank responded to the crisis by raising its policy rate to 24%, where it had stayed until last July.

The lira weakened to 6.08 against the dollar after the central bank move, compared with 6.0545 beforehand.

The bank has slashed its policy rate by 1,325 basis points since July.

Cutting rates further has become difficult after the lira weakened 2% against the dollar this year and inflation has edged higher in the past three months, after dipping briefly to single digits in the autumn.

Year-over-year inflation stood at 12.15% in January, above the central bank's policy rate, meaning lira depositors faced negative real rates. The bank targets inflation around 5%.

President Recep Tayyip Erdogan, who has described interest rates as the "mother of all evil," says high rates stoke inflation, contrary to mainstream economic thinking. He has called for single-digit interest rates in 2020, raising concern about the independence of the central bank.

The median estimate for the year-end policy rate stood at 10%, according to the Reuters poll on Monday, with estimates ranging from 12.50% to 9.0%.

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