Turkish Central Bank signals early policy meeting, possible rate cut

ANKARA - Reuters

Central Bank Governor Erdem Başçı.

Turkey’s Central Bank may hold an early monetary policy meeting next week to discuss an interest rate cut if inflation continues to fall sharply, Governor Erdem Başçı said Jan. 27.

Başçı, who are under pressure from the government to lower rates ahead of the June parliamentary elections, said the Central Bank could act as early as Feb. 4 if data due a day earlier shows January inflation slowing by more than 1 percentage point.

The Turkish Lira weakened to 2.36 against the dollar on his comments, reversing earlier gains after he announced a cut in the bank’s forecast for inflation this year to 5.5 percent from a previous 6.1 percent.
“We could hold a meeting to make a quick decision,” he told a news conference called to announce the bank’s quarterly inflation report.

“If January inflation falls more than one (percentage) point and core (inflation) is good, we could even make an assessment on Feb. 4,” he added. The next monetary policy committee meeting is scheduled for Feb. 24.

Manik Narain, a strategist at UBS, said Başçı’s comments were “very dovish.”

“Considering emergency meetings in line with falling inflation does seem arguably a bit premature, given that their inflation target is 5 percent... It does create some medium-term risks,” Narain said.

The Central Bank lowered its main interest rate last week and drew a swift rebuke from government ministers who said the 50 basis point cut was not enough to support economic growth.

The Bank cut its main one-week repo rate to 7.75 percent in response to slowing inflation, but left other rates on hold.

Inflation may drop to ‘lowest in 45 years’

Başçı said inflation could drop to its lowest point in 45 years in 2015 and said the midpoint of the Bank’s 2016 year-end inflation forecast was 5 percent.

The decline in inflation is expected to accelerate from this month, approaching the Bank’s 5 percent target in the middle of the year, he added.

Finance Minister Mehmet Şimşek said he was sure the Central Bank had done the calculations properly at another meeting Jan. 27.

“We see many positive developments which will push the inflation rate lower. First of all, we do not forecast a draught this year, as opposed to what happened last year. This will affect the food prices positively. Secondly, we see a relative stability in exchange rates. And most importantly, oil prices have been decreasing significantly,” Şimşek said.

The lira initially firmed to below 2.34 against the dollar following Başçı’s comments on inflation, from 2.35 before he spoke, but it eased back to 2.36 after he raised the possibility of an early policy meeting.

Turkish consumer prices fell 0.44 percent month-on-month in December for an annual rise of 8.17 percent and are expected to end this year at 6.82 percent, according to the latest Central Bank survey of business leaders and economists.

Başçı also said he expected a gradual increase in economic growth this year, spurred by domestic demand.