Mamma Mia!

TURKEY - In Brief 22 Apr 2020 by Murat Ucer

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The Monetary Policy Committee has cut the policy rate (weekly repo) by another 100 bps today to 8.75% (simple), which is more than our, as well as the consensus forecasts of around 50 bps reduction (see chart). To be honest, we stopped being surprised by our central bank’s actions to a great extent, but this one has taken us by a bit of a surprise.The Bank justifies the move on the grounds of a very weak growth and inflation outlook. It seems to have kept the very dovish inflation paragraph (link here) virtually unchanged from the previous statement (i.e. still sees downside risks to its forecast of 8.2%), which, of course, is debatable. But now growth concerns seem to have taken the centerstage, with the Bank making a fairly outlandish claim, to put it frankly, that “recent monetary and fiscal measures will contribute to financial stability and post-pandemic recovery by supporting the potential output of the economy”. We know that protracted periods of demand weakness might have some supply-side consequences eventually, but we fail to follow the logic or the connection here as to how exactly “potential” output is supported with expansionary monetary and fiscal policies.More importantly, the Bank does not acknowledge the risks or seem at all concerned about adverse consequences of real interest rates being deeply in negative territory. After all, the CBRT has been losing reserves at a very rapid pace, base money has been growing very fast, the lira has been depreciating quite rapidly despite the intervention, exposing firms with currency mismatches to another balance sheet shock; there is very little confidence in TL with the country risk premium hovering around all-ti...