Turkish Price Tweaks Set Stage for Rate Cuts in Governor's Debut

(Bloomberg) — Turkey’s central bank lowered its inflation forecast for this year, opening the door for what may be the biggest easing push in emerging markets even as new Governor Murat Uysal struck a note of caution.

Under the central bank’s base-case scenario released on Wednesday, inflation will end this year at 13.9%, down from its previous forecast for 14.6%. It left next year’s estimate unchanged at 8.2%. Price growth slowed in June to an annual 15.7% thanks to a stronger lira and a moderation in food and energy costs.

In the first policy meeting led by Uysal last week, the central bank pulled off its first interest-cut in three years and the biggest since a shift to inflation targeting in 2002.

A dovish turn by global central banks in a world plagued by $13 trillion of negative-yielding debt has left little in the way of deeper easing in Turkey, which until recently had the world’s highest real interest rate. President Recep Tayyip Erdogan, who fired Uysal’s predecessor for not lowering rates, said that Uysal’s 425-basis-point cut last week “is not enough.”

“Our actual analysis and projections show that there could be a significant room for maneuver in monetary policy, though I also emphasize that we’ve adopted a cautious stance,” Uysal said in Ankara.

The trimmed its advance against the U.S. currency as Uysal spoke, but held on to its sixth day of gains, extending the biggest rally in emerging markets this month.

It was trading 0.4% stronger at 5.5345 per dollar as of 12:25 p.m. in Istanbul. The yield on government bonds fell three basis points to 15.49%.

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The Turkish president has reiterated that he believes inflation will soon slow to single digits, with rate cuts allowing the economy to reach its potential growth. The central bank on Wednesday lowered its 2019 forecast for average oil prices to $65 a barrel from $67 and cut its prediction for food inflation at the end of the year to 15% from 16%, according to Uysal.

The broader revision was driven by better expectations than in April, lower food inflation and import prices, according to Uysal. He said Turkish inflation faces a supportive backdrop.

For his part, Uysal vowed to preserve “a reasonable rate of real return” for investors, a level he didn’t specify on Wednesday. Adjusted for the annual change in the headline figure for consumer prices, Turkey’s benchmark is now near 4%, down from over 8% before the rate cut.

“The reasonable real rate for us corresponds to a monetary stance that’s mindful of the economy’s internal and external balances and also maintains a continuation of an inflationary decline,” he said. “This concept must also consider the balancing in financial flows.”

To determine the level of real borrowing costs it deems “reasonable,” Uysal said the central bank also assesses variables that include portfolio preferences of domestic investors and real rates in peer countries.

The remarks “suggest caution in reducing the real rate,” according to Inan Demir, an economist at Nomura International Plc in London. Still, “there are question marks on the level of a real rate that would be acceptable under political constraints,” he said.

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(Updates with analyst comment in final paragraph.)

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