UPDATE - Turkey’s Central Bank lowers interest rates 425 bps

UPDATES WITH MORE COMMENTS FROM CENTRAL BANK; ADDS DETAILS

By Muhammed Ali Gurtas

ANKARA (AA) - The Central Bank of Turkey (CBRT) on Thursday lowered its one-week repo rate 425 basis points.

The bank's policy rate -- also known as one-week repo rate -- fell to 19.75%, a steep down from 24%.

"Recently released data indicate a moderate recovery in the economic activity," the CBRT said.

The decision came in a statement from the bank's Monetary Policy Committee (MPC) meeting -- the fifth of eight meetings scheduled for 2019.

"Goods and services exports continue to display an upward trend despite the weakening in the global economic outlook, indicating improved competitiveness.

"In particular, strong tourism revenues support the economic activity through direct and indirect channel," the bank said.

In 2018, the bank held nine MPC meetings, as interest rates climbed from 8% to 24% over the course of the year.

"Looking forward, net exports are expected to contribute to the economic growth and the gradual recovery is likely to continue with the help of the disinflation trend and the partial improvement in financial conditions," the CBRT said.

In May, the country's exports rose 12.1% on a yearly basis to nearly $16 billion, while imports saw an annual decline of 19.3% to $17.8 billion.

"The composition of growth is having a positive impact on the external balance," it said. "Current account balance is expected to maintain its improving trend."

According to the latest data, Turkey's current account balance posted $151 million in May, improving from a $6.17 billion deficit a year ago, as the 12-month rolling deficit totaled $2.37 billion.

Last year, the current account balance posted a deficit of $27.6 billion, improving from a nearly $47.5 billion deficit in 2017.

"Recently, weaker global economic activity and heightened downside risks to inflation have strengthened the possibility that advanced economy central banks will take expansionary monetary policy steps.

"While these developments support the demand for emerging market assets and the risk appetite, rising protectionism and uncertainty regarding global economic policies are closely monitored in terms of their impact on both capital flows and international trade," it said.

On the inflation side, the bank said that the outlook continued to improve.

"In the second quarter, inflation displayed a significant fall with the contribution from a deceleration in unprocessed food and energy prices.

"Domestic demand conditions and the tight monetary policy continue to support disinflation," it said.

In June, consumer prices in Turkey rose by 15.72% on a yearly basis, while annual inflation was 18.71% in the previous month.

Over the past decade, annual inflation saw its lowest level at 3.99% in March 2011, and it peaked at 25.24% last October.

The CBRT noted that underlying trend indicators supply side factors and import prices lead to an improvement in the inflation outlook.

"Accordingly, considering all the factors affecting inflation outlook, the Committee decided to reduce the policy rate by 425 basis points.

"The Committee assesses that maintaining a sustained disinflation process is the key for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery," it said.

As noted in the new economy program announced in September 2018, Turkey’s inflation rate target is 15.9% this year, 9.8% next year, and 6.0% in 2021.

The bank also said keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance.

"In this respect, the extent of the monetary tightness will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process.

"The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives," it added.