January 30, 2020 / 8:42 AM / in 25 days

UPDATE 2-Turkish central bank still optimistic on inflation, may cut more

(Adds comments on exchange rate, independence, context, byline)

By Ece Toksabay, Nevzat Devranoglu and Tuvan Gumrukcu

ANKARA, Jan 30 (Reuters) - Turkey’s central bank remains optimistic inflation will drop toward 8.2% by the end of the year, keeping the door open to a bit more policy easing after it aggressively cut interest rates last year.

The bank will set “prudential” monetary policy to sustain the decline in inflation, even though the year-over-year rate will remain “horizontal” for some time, Governor Murat Uysal said on Thursday as he announced quarterly forecasts.

While the bank does not target a foreign-exchange level for the Turkish lira, which can whip-saw inflation rates, the real exchange rate based on imports and exports looks “competitive” at current levels, Uysal said.

The lira slipped about 0.3% to 5.9790 against the U.S. dollar by 09:13 GMT, its weakest in three weeks.

Some investors worry the bank will ease policy too far tmsnrt.rs/3aQDXp8 and leave the lira vulnerable to another shock. Economists are less optimistic than the central bank, forecasting inflation will only fall to 9.6% this year, based on a Reuters poll.

“Overall, the central bank has been overly optimistic on the inflation outlook,” said Jason Tuvey, senior emerging markets economist at Capital Economics, adding it was “positive” that the bank did not lower its forecasts, as it did in October.

The bank’s end-2020 forecast of 8.2% was unchanged from its October report. It predicted 5.4% inflation by the end of 2021, which would return the rate to the range of a formal 5% target.

Inflation stood at 11.8% in December after a dramatic drop throughout 2019, thanks mostly to base effects from a 2018 currency crisis.

In turn, the bank has slashed its policy rate by 1,275 basis points since July to 11.25%. A 75-point cut in January brought real rates into negative territory for local savers.

Uysal repeated that policy is consistent with targeted “gradual” disinflation. “The prudential stance in monetary policy needs to be maintained (and) we will shape policy to ensure a continued fall in inflation,” he said.

He added that a stable FX rate is important. “The current level in real exchange rate is competitive when we look at import export levels,” he said.

Turkish President Tayyip Erdogan, who has pressed publicly for lower rates to boost economic growth after a recession, appointed Uysal in July after abruptly sacking his predecessor for not following policy instructions.

Asked Thursday about political pressure interfering with policy decisions, Uysal said: “The central bank is making data-oriented decisions according to inflation outlook.”

For a graphic of inflation and interest rates, see: tmsnrt.rs/3aQDXp8

Additional reporting by Ezgi Erkoyun; Writing by Jonathan Spicer; editing by Dominic Evans, Larry King

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