May 18, 2020 / 2:46 PM / 2 months ago

POLL-Turkey central bank to cut rates a modest 50-pts to 8.25%

* reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/cb-polls?RIC=TRINTQP poll data

* Policy rate seen at 8% at end-2020

* Central bank lowered 2020 inflation expectation to 7.4%

By Ali Kucukgocmen and Nevzat Devranoglu

ISTANBUL, May 18 (Reuters) - Turkey’s central bank is expected to cut its policy rate by 50 basis points to 8.25% this week, a Reuters poll showed on Monday, easing policy for a ninth straight time after it recently trimmed an inflation forecast.

The bank has cut its policy rate by 1,525 basis points since July last year in a forceful bid to pull the economy out of a recession and, more recently, to counter the economic downturn brought on by the coronavirus outbreak.

With the outbreak hammering domestic demand, tourism and exports, the central bank last month lowered its inflation forecast for end-2020 to 7.4%, from 8.2% earlier, opening the door to more rate cuts.

The monetary easing is expected despite a 13% slide in the lira this year due to concerns over Turkey’s depleted foreign reserves and relatively high foreign debt obligations, and to economic fallout from measures to contain the pandemic.

In the Reuters poll of 15 economists, the median estimate was for a cut in the policy rate to 8.25%. Estimates ranged from a 25-point cut to 8.5%, to a 100-point cut to 7.75%.

Plummeting global oil prices have pushed inflation down in import-dependent Turkey, while on the other hand the lira depreciation raises import prices. The lira hit an all-time low of 7.2690 versus the dollar earlier this month before rallying.

Bank of America’s Ferhan Salman said the central bank sees room to loosen policy given its lower inflation forecast.

“We agree (that) low oil prices and weak demand mute FX pass-through to inflation. Weak demand also curbs producers’ ability to pass on cost changes to the headline,” he wrote in a client note, adding lockdowns could depress services inflation.

The median estimate of 10 economists for the policy rate at year-end stood at 8%. Some respondents said the bank would hike rates again by then while others said it would continue the easing cycle, with forecasts ranging between 8.75% and 7.75%.

The central bank has slashed rates by 200 basis points, and provided some funding below the policy rate, in order to stimulate the economy since Turkey recorded its first COVID-19 case.

The bank has also executed record bond-buying stimulus including purchasing more than 40 billion lira ($5.8 billion) of government debt since the end of March, half of it from Turkey’s Unemployment Insurance Fund.

It held some 65.2 billion lira of bonds as of Friday, compared to 19 billion lira at the end of 2019, and has doubled its effective limit on purchases for the year to 10% of total assets.

A sharp drop in the central bank’s net FX reserves - to $26 billion from $40 billion this year, in part due to state bank interventions to prop up the lira - have raised analyst concerns that Turkey needs foreign funding.

Reuters reported last week that Turkish Treasury and central bank officials have held bilateral talks with counterparts from Japan and the United Kingdom on setting up currency swap lines, and with Qatar and China on expanding existing facilities.

The bank will announce its rate decision on May 21 at 1100 GMT. ($1 = 6.8715 liras) (Editing by Jonathan Spicer)

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