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The Inflation Report paves the way for 150-200 bps rate cuts: TL weakness will advance

Following Uysal's dovish comments, it is no surprise that lira is again under pressure also fueled by the poor trade data since Turkey offers almost the world’s lowest rates in the emerging market universe when adjusted for inflation that leaves the lira exposed to the global selloff. 

The Inflation Report paves the way for 150-200 bps rate cuts: TL weakness will advance

CBTR Governor Murat Uysal as he unveiled the second quarterly inflation report of 2020 revised down Turkey’s inflation outlook for the end of this year from 8.2% to 7.4%.  The revision is based on weaker domestic demand, oil shocks and tame food price inflation (revised down to 9.5% from 11%) related to the coronavirus outbreak, while Uysal said inflation will decline to 5.4% by the end of 2021.  As of March Turkey’s CPI inflation is at 11.9%. The governor expects to see rapid drop in Turkey’s inflation starting from July 2020.

The move means the central bank is positioned for another 150-200 bps rate cut with its policy rate currently at 8.75%; which follows the eighth straight reduction since Uysal’s appointment in July 2019.

Once again the Turkish administration under President Erdogan’s guidance is seeking fiercely to resume growth taking the risk of further lira weakness which has depreciated around 15% versus the US dollar since the start of the year.  Such depreciation could have doubled if it was not for the swap operation the central bank carried out with the public banks that have been supporting the value of the lira at the expense of mush weaker fx reserves which has fallen to critically low levels as of mid-April.

Following Uysal’s dovish comments, it is no surprise that lira is again under pressure also fueled by the poor trade data since Turkey offers almost the world’s lowest rates in the emerging market universe when adjusted for inflation that leaves the lira exposed to the global selloff.

SWAP talks not going that well as understood

Uysal added that Turkey’s swap negotiations continue with various central banks noting that a swap deal with the IMF was not an option.  Uysal believes recovery in the Turkish economy would commence in the second half of the year.

He stated that the extraordinary period was over.  He claimed that the fluctuation in the fx reserves was natural and was temporary.

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