Turkey cenbank slows easing with 100-point cut, flags inflation risk

By Daren Butler and Ece Toksabay

ISTANBUL, Oct 23 (Reuters) - Turkey's central bank slowed its easing cycle with a 100 basis-point cut in its policy interest rate to 39.5% on Thursday, as expected, flagging renewed inflation risks that pointed to a slowdown in a longer-term disinflation process.

At its previous meeting in September, the bank had already tapped the brakes with a 250-point cut in the face of higher-than-expected inflation and heightened political risk. A 300-point cut was made in the meeting before that, in July.

The underlying trend of inflation increased in September, the central bank said in its statement after the meeting.

"While recent data suggest that demand conditions are at disinflation levels, they also point to a slowdown in the disinflation process," it said.

The lira TRYTOM=D3 was subsequently unchanged at 41.9850.

"It's basically in line with the adjusted market expectations (of a smaller cut following the September inflation print) so it should be enough not to scare the market at this stage," said Kieran Curtis, head of EM local currency debt at fund manager Aberdeen.

Turkey's annual inflation jumped to 33.29% in September, well above expectations, triggering predictions of a slowdown in the monetary easing cycle. Inflation was also higher than expected in August, a month in which the bank set an end-year inflation forecast of 24%.

The higher inflation trend is expected to continue in October.

"The next challenge for the central bank is if they do get a high inflation reading for October, will they pause at the next meeting," Curtis said.

In a Reuters poll, the majority of 17 economists forecast a cut in the one-week repo rate, with the median forecast being a 100 basis-point cut. Four economists expected rates to be unchanged.

"The step size is reviewed prudently on a meeting-by-meeting basis with a focus on the inflation outlook," the bank said, repeating that its policy stance will be tightened if the inflation outlook deviates significantly from interim targets.

In April, it hiked rates to 46%, reversing an easing cycle that had begun in December, following market volatility over the March arrest of Istanbul Mayor Ekrem Imamoglu, who is President Tayyip Erdogan's main rival.

Imamoglu is from the main opposition Republican People's Party (CHP), which has been the target of a year-long legal crackdown and is facing a potential court ruling on Friday that could result in the ouster of the party's leader.

While economists expected a slowdown in easing this month, they also expect rate cuts to continue in this year's last meeting in December, with the policy rate seen falling to 37.5% by end-2025. In a September poll, the end-year forecast was 37%.