The decision by the TCMB was widely considered to be the result of political interference by the Turkish President. Recep Tayyip Erdogan (pictured) replaced Murat Çetinkaya as governor of the central bank by the seemingly more pliant Murat Uysal, on July 5. On that occasion, the Turkish president explained the first firing of a governor of the central bank since 1981 as a result of Mr Çetinkaya’s unwillingness to lower rates. The Turkish President believes that lowering Turkey’s high inflation requires lowering the central bank rates.
The accompanying statement from the TCMB reflects the complex political situation in which the monetary policy decision took place. Asides from the headline decision, and noting the increasingly accommodating stance of central banks around the world, nothing in the rest of the text seems to indicate a need for a rate cut in order to stem high inflation. Minutes of the meeting scheduled to be published during the next week will show how the rest of the bank’s board responded to the removal of Mr Çetinkaya.
ECB Adjusts Forward Guidance
Despite the lack of rate action, the monetary policy decision of the ECB was marked by a noticeable change in forward guidance. Previously, the ECB had noted that it expected “the key ECB interest rates to remain at their present levels at least through the first half of 2020″. In July, this changed to an expectation that “the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020.” The accommodating monetary policy stance was motivated by “inflation rates, both realised and projected, have been persistently below levels that are in line with its aim,” according to the ECB’s statement. The shift in stance caused the DAX to first rise by 80bps before losing 290bps.
The ECB’s decision was consistent with expectations. Erik Meyersson, Senior Economist for the Eurozone at Handelsbanken Capital Markets, had noted that the ECB was not going to lower rates this month, only in September. In his comment ahead of the meeting he noted that “we revise our 2019 forecast for the ECB and now expect it to readjust its forward guidance in July and lower its deposit rate by 10bp in September. We also see an increasingly likely possibility that the bank will reintroduce a version of quantitative easing (QE) in H2.”
Two days ahead of the decision, the Euro area July bank lending survey also showed credit standards tightening for loans to enterprises amid concerns about the economic outlook. Loan demand also increased across all loan categories, while access to funding had improved.