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Financial News: Turkey CB Unlikely To Cut Rates This Year:

Turkey CB Unlikely To Cut Rates This Year: Capital Economics

06/20/2017 - 07:03:00 (RTTNews)

(RTTNews) - The Turkish central bank is unlikely to cut its policy rates this year amid high inflation and strong GDP growth, William Jackson, an economist at Capital Economics, said.

The central bank kept its official interest rates on hold on June 15.

The one-week repo rate was held steady at 8.00 percent, the overnight rate at 9.25 percent and the late liquidity rate, which is now the key rate for monetary policy, at 12.25 percent. That brought to an end the recent tightening cycle, which has raised the average cost of central bank funding by around 350 basis points since the turn of the year, Jackson observed.

The economist noted that there seems to be a growing view that lira strength, easing inflation and government pressure may prompt a shift towards looser monetary policy.

Nonetheless, the monetary policy committee communication was hawkish, Jackson noted. One of the reasons for that could be the recent strength of the economy, which means the Council probably sees little need for looser policy.

The annual GDP growth rate for the first quarter was 5.0 percent and the MPC expects growth to accelerate further. "For our part, we think growth will remain strong over the rest of the year, before slowing sharply in 2018," the economist said.

The central bank also seems to be taking the need to tackle inflation more seriously than it has in the past amid concerns over high inflation expectations, the economist added

"Even so, we still think bank is too optimistic on the inflation outlook," the economist noticed.

Capital Economics expect inflation to stay in double digits this year and remain far above the central bank's 5 percent target and, indeed, the upper bound of its 5±2 percent target range over the forecast horizon.

Meanwhile, the central bank sees inflation falling to 8.5 percent by the end of this year and 7.5 percent by mid-2018.

"Against this backdrop of strong growth this year and high inflation, the interest rate cuts that some now seem to be expecting this year are unlikely to materialise," the economist predicted.

Policy easing is more likely around the middle of next year when growth will probably be slowing and inflation will have moved into a more comfortable range for the central bank, Jackson noted.

"At that point, we think the late liquidity rate may be lowered by around 175 basis points, to 10.50 percent by year-end," the economist added.

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