May 21, 2020 / 11:48 AM / 7 days ago

UPDATE 2-Turkish central bank trims rates, says worst might be over

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By Ali Kucukgocmen and Ezgi Erkoyun

ISTANBUL, May 21 (Reuters) - Turkey’s central bank cut its policy rate by 50 basis points to 8.25% as expected on Thursday, taking advantage of recent lira strength to keep supporting an economy that it said may be emerging from the worst of the coronavirus pandemic.

The bank called its ninth straight rate cut “modest” and said there were signs that Turkey’s economy may have bottomed out earlier this month after activity ground to a virtual halt due to measures to contain the outbreak.

The benchmark one-week repo rate was lowered from 8.75%, continuing an aggressive easing cycle reut.rs/3aFs7h9 that began last July when it stood at 24%.

Economists polled by Reuters expected a 50-point cut, and some said afterward the bank may have signalled an end to the easing.

“Today was a rare display of caution,” said Phoenix Kalen of Societe Generale. The statement “seems to imply that the central bank is temporarily done with its easing cycle” though it did not rule out further “modest” rate cuts, she said.

The move comes despite investor concerns over Turkey’s depleted FX reserves that pushed the Turkish lira to an all-time low on May 7. The currency has since rallied on expectations of foreign funding, easing the risk of inflation.

The lira is down about 13% so far this year but was flat after the rate cut, which drove Turkish real rates deeper into negative territory.

The central bank said that despite lira weakness, cheap commodities prices should keep inflation in line with its year-end forecast of 7.4%, noting the “current” policy stance supported this.

Fallout from the outbreak has hammered domestic demand, tourism and exports and is expected to tip the economy into its second recession in less than two years.

After a sharp economic weakening in April, the bank said there are signs in the first half of May of bottoming-out following moves to roll back the partial lockdown.

It expects the current account balance to follow a “moderate course” this year as imports are restrained, it added.

Writing by Jonathan Spicer; Editing by Ece Toksabay and Alexandra Hudson

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