​CBRT opens up easing round with 425 pips

TURKEY - In Brief 25 Jul 2019 by Atilla Yesilada

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As our economics guru Dr Murat Ucer is in transit, his acolyte Atilla Yesilada is reporting on CBRT MPC decision. It may have surprised the participants in sundry polls which anticipated 200-250 basis point rate cut, but didn’t surprise us (we penciled in 300-350, with an upside bias), when CBRT announced a hefty 425 point easing. Committee Members explained their bold decision in the following paragraph of the CBRT statement: “Inflation 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. Underlying trend indicators, supply side factors, and import prices lead to an improvement in the inflation outlook. In light of these developments, recent forecast revisions suggest that inflation is likely to materialize slightly below the projections of the April Inflation Report by the end of the year. Accordingly, considering all the factors affecting inflation outlook, the Committee decided to reduce the policy rate by 425 basis points”. I personally don’t think CPI or core inflation would drop below our year-end targets, CPI being around 15-16%, unless the current very modest to no-growth environment mutates into a deep recession.Neither does CBRT take into account very likely administered price hikes to electricity, natural gas, alcohol and tobacco products to reduce the budget deficits rushing towards 4.5% of GDP, which should boost inflation. Needless to say, it doesn’t factor in potential currency shocks from S-400 sanctions or the unfolding conflict with EU, either...