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Turkish Central Bank Cuts Rate Unexpectedly

Turkey's central bank cut its key interest rates unexpectedly on Thursday as policymakers assessed that the recent inflationary pressures were due to transitory factors and that the tighter policy stance was hurting bank lending.

The Monetary Policy Committee, led by Governor Sahap Kavcioglu, lowered the policy rate, which is the one-week repo auction rate, from 19 percent to 18 percent. Economists had expected the rate to be left unchanged.

The central bank said it will "continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved in pursuit of the primary objective of price stability".

Policymakers decided to cut the rate despite concerns over rising inflation. The country's President Tayyip Erdogan has been seeking lower interest rates over the past few months.

"Looking ahead, we expect inflation to fall sharply over the next six to nine months and, against the backdrop of political pressure, that is likely to trigger further aggressive easing," Capital Economics economist Jason Tuvey said.

The firm expects the one-week repo rate to be lowered to 12.00 percent by the middle of next year.

"But looser monetary policy in the context of an economy already operating above its pre-virus trend risks causing imbalances to building and sowing the seeds of another balance of payments crisis," Tuvey added.

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