Turkey: Continued monetary easing – is it too rapid?

The Monetary Policy Committee today continued its rapid monetary easing path, lowering its key policy one-week repo rate by 200bp to 12%, arguing that the inflation outlook continued to improve and the economic recovery goes on, while investment demand remains weak (which would argue for lower interest rates). This was the fourth rate cut since July 2019, halving the policy rate from 24% in June. However, the size of today’s rate cut appears a bit large, considering that headline inflation jumped back to 10.6% y/y in November (from 8.6% in October) and is forecast to rise further, largely due to base effects, so that it may soon be higher than the new policy rate. Meanwhile, the current account posted another surplus of +USD1.5bn in October, but this was lower than a year ago. Hence, the rolling 12-month surplus narrowed to +USD4.3bn. More worrisome, net portfolio investment turned outward again in October (-USD3.6bn), even though current global financial conditions support the demand for emerging market assets. We expect the vulnerability of capital inflows to Turkey to continue throughout 2020, given current Turkish economic policies.