Central Bank of Turkey cuts interest rate by 75 bps to 11.25 pct

Turkish central bank met today for its interest rate decision. The Central Bank of Turkey cut its benchmark rate again today by 75 basis points to 11.25 percent, arguing that the inflation outlook continues to rebound. However, inflation accelerated in December to around 12 percent, making the Turkish real interest rate negative now. The Turkish lira is expected to weaken sharply as soon as an EM risk off environment arrives, said Commerzbank in a research report.

Most private forecasters anticipate continued high inflation. The Bloomberg consensus is for inflation to remain close to 11 percent even in two years’ time. The Turkish central bank expects inflation to ease to 5 percent target in two years’ time.

“We are more pessimistic, because we incorporate the feedback loop of lira depreciation back onto inflation. Even when USD/TRY was stable at around 5.80 through H2 2019, underlying inflation was running at c.1.1 percent month-on-month, which annualises to 14”, added Commerzbank