Central Bank governor signals rate cut, says Turkey inflation to continue recovery

Inflation prospects are improving in Turkey, especially after seeing improvement in credit growth and a moderate recovery in economic activity, the governor of the Central Bank of the Republic of Turkey (CBRT) said Wednesday.

Speaking at the September assembly meeting of the Ankara Chamber of Industry, Murat Uysal said that economic activity in Turkey had entered a rebalancing process since the second quarter of the year.

Underlining that this recovery and rebalancing trend was continuing in the second half of the year, the governor said inflation will continue to improve in the upcoming period.

Uysal also said the CBRT expected further improvement in the current account balance, which "is still on a track of stable improvement," in the rest of 2019.

"We anticipate that risk premiums and financial volatility will also decrease in the upcoming period and recovery in economic activity will continue," he said.

Pointing out that the revival in credit growth came after interest rate cuts, Uysal added: "The revival in the credit market will become more apparent in the upcoming period due to the lagged effect of the monetary policy transmission mechanism."

The governor asserted that in order to make the decline in inflation permanent, the current cautious stance in monetary policy must be maintained.

"In this context, the CBRT will determine the level of tightness in monetary policy in a way that will ensure the continuation of this decline in inflation," he said.

"Price stability and growth are complementary. Achieving price stability lowers uncertainty as well as interest rates, which supports investments and growth potential," he added.

In minutes released from last week's monetary policy committee meeting, the CBRT had said leading indicators pointed to a continued moderate recovery trend in the third quarter.

The bank also decreased the benchmark interest rate, the one-week repo rate, by 3.25% to 16.50%, a decision that surpassed the median expectation for 275 basis points.

In the face of rising inflation, the CBRT increased the interest rates to 24% in September 2018, from 17.75% at the time. However, in its July meeting, the bank cut the rates massively by 425 basis points to 19.75%.

In July, the bank cut its year-end inflation forecast for 2019 to 13.9%, down from 14.6% in its previous report. The rate is expected to fluctuate between 11.5% and 16.3% through the end of this year, the bank's Governor Murat Uysal said.

The bank kept inflation forecasts constant for next year and 2021 at 8.2% and 5.4%, respectively.

The country's inflation rate target is 15.9% this year, 9.8% next year, and 6.0% in 2021, under the new economic program announced last September.