As expected, the Monetary Policy Committee today lowered its key policy one-week repo rate – by 250bp to 14%, arguing that the moderate economic recovery continues and the inflation outlook improves. The size of the rate cut appears appropriate – we had argued that a too bold cut (by 350bp or more) could raise risks of TRY instability again. Headline inflation fell to 9.3% y/y in September due to strong base effects but we forecasts it to return to double digits by the end of the year. Advanced indicators indeed suggest that the recession has bottomed out but also that the recovery will be bumpy. Industrial production dropped again by -3.6% y/y in August after the decline had eased to -1.1% in July. Likewise, the decline in real retail sales accelerated to -4.3% y/y in August (-0.8% in June). Moreover, there are considerable downside risks to the recovery of the still vulnerable economy, including ongoing political uncertainties. The TRY has been volatile in October, losing -5% vs. the USD in the first half of the month, of which it has recovered half as of today.
