Turkish central bank surprises by slashing rates 200 pts to 16%

In a statement the bank suggested there would be little more room to ease policy through year end


ISTANBUL- Turkey's central bank slashed its policy rate by an unexpected 200 basis points to 16% on Thursday, sending the lira to a new all-time low and delivering further stimulus sought by President Tayyip Erdogan despite rising inflation.

The bank said there would be little more room to ease policy through year end given what it called "transitory" supply-side pressure on prices of food, energy and other imports, which have grown costly due to the sharp currency depreciation.

The rate cut was twice as much as the most dovish estimate in a Reuters poll, which forecast the policy repo rate would fall by 50 or 100 basis points.

The central bank, under pressure from Erdogan, also surprised markets last month with a 100-point cut that sent the currency tumbling to new depths. 

Analysts called the policy easing premature and reckless given it left Turkey's real yields sharply negative, and it runs against the grain of a world in which central banks are raising rates to head off global price rises.

The lira weakened as much as 3% to a record 9.501 versus the dollar before paring some losses. It has shed 22% this year, with most of the drop since the beginning of September when the bank began giving dovish signals.

President Tayyip Erdogan has long called for monetary stimulus and has sacked the last three central bank governors in less than 2-1/2 years, eroding the bank's credibility and sending foreign investors fleeing. 

A self-described enemy of interest rates, Erdogan fired three more monetary policy committee (MPC) members just last week - including two seen to oppose rate cuts - setting the stage for more easing.

After the policy meeting, the MPC said "supply-side transitory factors leave limited room for a downward adjustment to the policy rate until the end of the year."

Annual headline inflation rose to 19.58% last month amid soaring living costs for Turks, including costly food and housing, which in turn have hurt Erdogan's opinion polls.

Inflation has been in double digits for most of the past five years and well above a 5% target. 

The bank has recently focused on a core "C" measure, which is lower than headline but also rose to 17% last month.

For import-heavy Turkey, lira depreciation leads to higher inflation via imports.

(Reporting by Ezgi Erkoyun and Daren Butler; Editing by Jonathan Spicer) ((daren.butler@tr.com; +90-212-350 7053; Reuters Messaging: daren.butler.thomsonreuters.com@reuters.net))

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