October 31, 2019 / 10:55 AM / 21 days ago

Turkey's room to cut rates is dwindling, central banker says

ISTANBUL (Reuters) - Turkey’s Central Bank has used a significant part of its leeway for loosening monetary policy, Governor Murat Uysal said on Thursday, after the bank cut its key interest rate by 1,000 basis points in less than four months.

FILE PHOTO: Turkey's central bank governor Murat Uysal is pictured during a news conference in Ankara, Turkey, July 31, 2019. REUTERS/Alp Eren Kaya

Uysal also said the bank had lowered its mid-point inflation forecast for the end of 2019 to 12%, down from a prediction of 13.9% in July. Analysts had expected a reduction to 12% or lower.

A currency crisis last year tipped Turkey’s economy into recession and sent inflation soaring above 25%, prompting aggressive monetary tightening. Inflation eased to as low as 9.26% in September.

“I want to stress that ... at the point we have reached, we have used a significant portion of the space in the loosening direction,” Uysal told reporters at a news conference to present the bank’s quarterly inflation report.

A moderate recovery in economic activity continues, but investment remains weak and a weakening global outlook is tempering external demand, the governor said.

The bank slashed its policy rate TRINT=ECI to 14% last week, taking advantage of slower inflation and a steadier lira after Washington canceled sanctions over Ankara’s Syrian military offensive. The repo rate stood at 24% before it began easing policy in late July.

“There is a notable improvement in the main inflation trend. That is the fundamental factor in our decision,” Uysal said. “The expansionary global monetary policies support us.”

Asked about the threat of sanctions, he said Turkey’s financial system was prepared for all risks. On Wednesday, Washington said it had a list of possible Turkish sanctions targets but did not expect to use them.

INFLATION OUTLOOK IMPROVING

Uysal said the latest rate cut was due not only to “base effects” but also to improvements in inflation expectations and pricing behavior. He said the bank’s future policy steps would depend on further developments in inflation.

A year after it rose sharply, Turkey’s annual inflation dropped to 9.26% in September, reaching single figures for the first time in more than two years thanks to the higher year-over-year measurement base.

The lira TRYTOM=D3, which slid nearly 30% against the dollar last year, was unmoved by the central bank comments. It stood at 5.7230 at 1151 GMT, weakening from a close of 5.6970 on Wednesday in part due to a signal from the U.S. Federal Reserve on Wednesday that it was ready to halt further rate cuts.

The improvement in Turkey’s inflation outlook is continuing, with base effects, tight monetary policy and domestic demand also contributing to declines, Uysal said.

Consumer price inflation is expected to remain in single digits in October and rise in the last two months of 2019, he said. The central bank kept its forecast for end-2020 inflation unchanged at 8.2%, with inflation seen at 5.4% at end-2021 and 5% in the medium term, Uysal said.

At the same time on Thursday, in the southeastern city of Malatya, Turkish Finance Minister Berat Albayrak said inflation will hopefully fall below Ankara’s targets of 12% in 2019 and 8.5% in 2020.

Since Turkey began an assault on northeastern Syria three weeks ago, traders have said that state banks have sold dollars at certain times to cushion lira depreciation.

Uysal said state banks have been more active in markets conducting two-way transactions, adding the central bank had recently used swaps more often than usual to fund them. For now, he added, additional measures on swaps were not needed.

Additional reporting by Behiye Selin Taner, Jonathan Spicer and Can Sezer; writing by Daren Butler; editing by Dominic Evans, Larry King and Alexandra Hudson

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