(Bloomberg) -- Turkey’s central bank cut its main interest rate for a second straight month and signaled similar cuts in future meetings by tweaking its guidance.
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The Monetary Policy Committee, led by Governor Fatih Karahan, lowered its one-week repo rate to45% from 47.5%. All economists surveyed by Bloomberg had forecast the 250 basis-point reduction.
In its statement, the central bank dropped a reference to monthly inflation, which had until now served as one of its key gauges. Instead, it said monetary policy would be determined by looking at expected as well as realized inflation.
The wording “implies that rate cuts will continue,” said Haluk Burumcekci, an Istanbul-based economist.
Barclays Plc economist Ercan Erguzel said the changes “limit expectations for a pause in the central bank’s easing cycle.”.
Most analysts expect that Turkey will ease policy at the same rate for the seven remaining MPC meetings this year.
“The underlying trend of inflation and the general conjuncture continue to be supportive of rate cuts, when adjusted for seasonal effects,” said Onur Ilgen, head of treasury at MUFG Bank Turkey in Istanbul.
The monetary authority also removed reference to the convergence of inflation expectations with officials’ projected path.
“The tight monetary stance will be maintained until price stability is achieved via a sustained decline in inflation,” the bank said. It reiterated that further decisions would be taken “meeting-by-meeting.”
Annual inflation slowed to 44.4% in December and markets see it at 27% at the end of the year. The central bank, meanwhile, is aiming for 21%, even though it expects an acceleration in January, driven by services.
Tufan Comert, global markets strategy director at BBVA in London, said the central bank will maintain its strategy of ensuring the lira appreciates in real terms, so as to bolster its attempts to slow inflation.
This means interest rates will be kept high in real terms “even in a cycle of rate cuts,” he said, expecting the lira carry trade to remain attractive to emerging-market investors this year.
Carry traders borrow in low-yielding currencies and invest in higher-yielding ones.
Turkish policymakers also signaled additional measures to manage excess liquidity, which swelled to a record of over 1 trillion liras ($28 billion) this month. Bloomberg Economics’ Selva Bahar Baziki said officials could tweak sterilization measures by extending the maturity on lira deposit auctions.