Dutch corporate sector is key source of current account surplus

By Central Banking Newsdesk | Research | 13 December 2019

SMEs save to finance investment due to higher borrowing rates than large companies

The record-high Dutch current account surplus is being boosted by the corporate sector, but the saving patterns of large firms and small and mid-sized enterprises (SMEs) differ, says the Dutch National Bank.

Last year, the Netherlands recorded a current account surplus of 11% of GDP. The savings behind this development are boosted by companies’ savings. Non-financial corporations accounted for roughly 80% of the Dutch savings surplus between 2000 and 2017, according to the DNB.

Nonetheless, there are important differences between large companies and SMEs. Smaller enterprises increased their savings in the wake of the financial crisis in order to finance their own investment.

“There are indications that suggest bottlenecks in the market for SME lending,” says the DNB. “For instance, the interest rate differential between [small firms’] and [large firms’] loans in the Netherlands has widened since the crisis and has remained high ever since. It is also relatively high compared with the euro area average.”

Saving among large corporations, 85% of which is accounted for by Dutch multinationals, is linked to higher foreign direct investment. “When calculating a country’s savings surplus, domestic investment is deducted from savings, but foreign investment is not,” says the DNB. “This means a substantial presence of multinational corporations’ headquarters boosts a country’s savings surplus.”

Basel Committee proposes illustrative prudential framework for crypto assets

By Central Banking Newsdesk | Official Record | 13 December 2019

Holdings of crypto assets would be split between banking book and trading book

Crypto assets could be subject to a “full deduction” from Common Equity Tier 1 (CET1) capital if held in the banking book, under a hypothetical prudential framework set out by the Basel Committee on Banking Supervision.

In a discussion paper, the BCBS outlines what a prudential framework could look like for high-risk crypto assets. Stakeholders have until March 13, 2020 to respond to the paper.

In the proposed example, direct holdings of crypto assets would be allocated to the banking book, while indirect exposures would be assigned to the trading book.

The full deduction for crypto assets in the banking book reflects the “high degree of uncertainty” about the value of crypto assets in times of stress, the Basel Committee said. Assets held in the trading book, however, would be subject to the “equivalent of a full deduction treatment for market risk and credit valuation adjustment (CVA) risk”.

The committee stated banks would not be permitted to use internally-modelled approaches for any crypto-asset exposures when accounting for market risk, counterparty credit risk or CVA risk. The standardised approach for measuring counterparty credit risk should be implemented, the BCBS said.

The final part of the example framework prohibits crypto assets from acting as financial collateral for the purpose of credit risk migration. Crypto assets would also not be eligible as high-quality liquid assets, the Basel Committee added.

Any exposure to crypto assets, the committee said, would be included in the leverage ratio and would be “subject to large exposure limits”.

Central bankers in favour of climate change goals in mandates

By Victor Mendez-Barreira | News | 13 December 2019

Central Banking’s Climate Risk Summit shows community rapidly embracing green policies

A majority of officials at central banks and other public-sector institutions said they supported adding climate change risks to central bank mandates, at Central Banking’s first Climate Risk Summit on December 12.

In the gathering held in Frankfurt, most participants embraced the adoption of green guidelines in policy areas ranging from reserves management, financial stability and monetary policy implementation. The conference brought together risk managers, reserve managers and individuals from supervisory authorities. Asked whether they would support adding climate change risks to current price stability goals, 58% of participants said they were in favour, 37% said they were against, while 5% said they were unsure.

The result shows a rapid evolution among officials. Earlier this year, in Central Banking’s Climate Change Survey, 68% of respondents opposed adding climate change mitigation to mandates. Nonetheless, summit attendees pondered the risks this change could have for central banks: 21% said it could imperil independence; 26% said climate change goals could come into conflict with other goals; and 11% thought it would hamper policy communication.

Exclusion of sovereign assets

Officials also favoured incorporating environmental guidelines into international reserve management.

The conference reflected on Sveriges Riksbank’s watershed decision in November to sell sovereign-debt assets from Australian and Canadian states due to their high-polluting record.

“Australia and Canada are countries that are not known for good climate work. Greenhouse gas emissions per capita are among the highest in the world,” said Martin Flodén, deputy governor, at the time the decision was announced.

The Riksbank’s action followed the inclusion of sustainability principles in reserve management in 2018. The Swedish central bank excluded from its portfolio regional bonds from Queensland and Western Australia, two major mining Australian states. It did the same for Alberta, Canada’s main oil-producing region.

Central Banking’s summit, which was held under the Chatham House rule, discussed the diplomatic backlash the measure could have for the Swedish government, and whether this approach could affect Riksbank’s independence. In spite of these risks, 76% of participants rejected the notion that excluding sovereign-debt assets on environmental grounds may compromise independence.

Financial stability, monetary policy

Officials widely agreed it is necessary to add climate change risks to stress tests. Participants reflected both on risks derived from the transition to cleaner energy production, and physical damage produced by climatic catastrophes.

There was a clear consensus these new capabilities would reinforce financial stability, and would not cause supervisors to disregard other risks factors such as banks’ capital adequacy, or household debt exposures. In fact, 76% of participants rejected the notion that stressing environmental risks supervision could contribute to supervisors overlooking pre-existing threats, while 24% warned this could happen.

Additionally, the summit studied the trade-offs involved in implementing environmental requirements in central banks’ refinancing operations. In a divided vote, 50% of respondents said central banks should reject collateral provided by banks if it was originally issued by entities violating environmental, social and governance (ESG) criteria.

Nonetheless, 32% said they were not sure about this measure, and 18% voted against. Among those rejecting immediate implementation, 80% said it could work in the future but now is too soon due to the lack of standard definition for ESG assets. And 20% said this policy should never be adopted, because it will hamper monetary policy transmission.

New NGFS members

In another sign of the community’s rapid change on environmental policies, the Network for Greening the Financial System reported a sharp increase of its membership on its second anniversary on December 12.

Since October, the group has added eight new members, including Bank Indonesia, the Bank of Japan, Bank of Korea, and the Central Bank of Colombia, reaching 54 members. Over the same period, three more organisations joined as observers. The Inter-American Development Bank, the International Organization of Securities Commissions and the Nordic Investment Bank increased the number of NGFS observers to 12.

BoE should improve governance around research, review finds

By Central Banking Newsdesk | News | 13 December 2019

Research has improved but some issues remain, Independent Evaluation Office says

Bank of England

The Bank of England is able to produce “outstanding” research and analysis, but issues remain in the ways that research projects and staff are governed, an independent review finds.

“Our evaluation has found good evidence that the investment in research following the 2014 strategic plan has helped the bank make progress on its research objectives,” the BoE’s Independent Evaluation Office says in the report.

The 2014 “One Bank” strategic plan established several priorities across various “pillars”, including an “analytic excellence” pillar. Other areas included a “diverse and talented” workforce, “outstanding execution”, and “openness and accountability”.

Despite highlighting the progress in the past five years, the IEO identifies three areas where the BoE could improve: clarifying the role of research in delivering the central bank’s “mission”; developing a clearer structure around career progression for researchers; and ensuring adequate resources to support research objectives.

In its response to the report, the BoE welcomes the findings and promises to take action across the three main areas. “The bank will need to consider how to change some aspects of the current practice and make decisions during 2020,” it says. “These decisions will take into account its overall research strategy, its future strategic priorities, as well as its budget and resource constraints.”

Careers and technology

The IEO says the BoE has made some progress in improving the career prospects for researchers, including by introducing a scheme that allows recently-hired PhD economists to devote half their time to their own research.

But it says there could be a benefit to introducing a more “structured” programme for researchers in their early careers and more support for new managers. It says the BoE needs to devote more attention to monitoring the mix of researchers at different seniorities, and clarify the different career paths researchers might take within the bank.

Additionally, the IEO urges the BoE to improve the technology and data researchers have access to, and further develop relationships with academic institutions and individuals.

BoE response

The BoE says it plans to improve information on career paths and offer additional support for junior researchers. From 2020, all senior researchers will be expected to mentor their more junior peers.

The central bank says it will consider appointing a “data librarian” in 2020 who would have both data management and research expertise.

It will also consider how to expand its “research hub”, a centralised resource that can allocate economists to specific projects as needed. The BoE says it may need to recruit some experienced generalists to expand the hub, and will also look at whether there should be a specific budget for “incubator” projects, or research on “substantially new priority topics”.

The BoE’s Court, its oversight body, welcomed the central bank’s “commitment” to implementing the proposals. “We will monitor the implementation of these recommendations as part of the IEO’s follow-up framework,” Bradley Fried, Court chair, writes in the introduction to the IEO report.

Bank of Guyana to manage new sovereign wealth fund

By Central Banking Newsdesk | News | 13 December 2019

New fund will invest profits from new oil revenue

The Bank of Guyana and the country’s finance ministry have signed an agreement setting out the central bank’s operational role in Guyana’s first sovereign wealth fund.

On December 11, finance minister Winston Jordan and central bank governor Gobind Ganga ratified sections 11 and 12 of the Natural Resource Fund (NRF) Act, passed by parliament earlier this year.

Under the agreement, the Bank of Guyana will be responsible for the day-to-day operations of the sovereign wealth fund, while the finance minister will remain the overall manager of the fund.

The fund has been established in accordance with the government’s preparations in becoming an oil-producing country, with the first oil extraction set to occur in 2020, according to a statement from the government.

The government estimates Guyana’s petroleum wealth represents approximately 0.2% of global reserves, which places the country 26th globally. However, it possesses the world’s seventh-largest oil reserves per capita, and the second-largest in Latin America, behind Venezuela.

“Guyana has a one-time opportunity to transform its oil wealth into well-being. But this requires getting the sovereign wealth fund rules right,” says Andrew Bauer, a consultant for the Natural Resource Governance Institute.

Other countries that have similar funds managed by their central banks include Norway (the Government Pension Fund Global), Chile (Social and Economic Stabilization Fund) and Botswana (Pula Fund).

Powers shared

In preparation for its role as operational manager of the NRF, the Bank of Guyana has begun building “additional capacity”, supported by the World Bank’s Reserves Advisory and Management Programme (Ramp), with which the central bank signed an agreement on October 1.

As the day-to-day manager of the fund, the central bank will be responsible for receiving and accounting for all deposits. All inflows to the NRF will be in US dollars, which will be deposited in US bank accounts held by the Bank of Guyana.

The government noted “most central banks and SWFs manage reserves by holding them in foreign denominated currencies outside of their jurisdiction”.

Once the central bank has the funds, it will have free rein to make investments within asset classes that are approved by the government. It will also have the power to appoint asset managers and custodians should it so wish. The central bank will be obliged to provide an update on the fund’s performance on a monthly, quarterly and annual basis.

As part of the operational set-up of the fund, as outlined in legislation, a flow of funds from the NRF into the national budget has been permitted. This flow of funds will be based on a pre-determined formula, a statement from the government says.  

While the remaining design aspects of the fund are yet to be revealed, the government has set it a number of objectives, including to reduce the impact volatile oil prices have on the economy. The fund has also been charged with “meeting the immediate and urgent development expenditure needs” of Guyana.

Surveying the market

Work began on the fund in 2017 with a government consultation. After several rounds of internal meetings with domestic sector participants and conversations with international experts, draft legislation was developed.

However, before this was presented to parliament, president David Granger requested a ‘green paper’ be published.

Entitled Managing Future Petroleum Revenues and Establishment of a Fiscal Rule and a Sovereign Wealth Fund, the paper was published in August 2018 by the Natural Resource Governance Institute.

Within it, the NRGI noted the huge potential oil could have for the country. “According to independent projections, fiscal revenues from the petroleum sector could range between US$7 billion and US$27 billion over the next 30 years,” it said.

The NRGI then went on to suggest a governance and operational framework for the fund, drawing on international models and best practice.

One of the key recommendations was to establish a clear risk management framework, focused on transparent communication. Part of this would involve the fund “explicitly listing the fund’s prohibited asset classes, including private-market and high-risk instruments and assets held in volatile or non-convertible currencies”.

The NRGI also urged Guyana to focus on creating a reputable governance framework. Given the probability large revenues are most likely a decade away, the paper recommended informing the public about revenue projections and uncertainty sooner rather than later.

Not doing so could risk over-indebting the government prior to the collection of large oil revenues, the NRGI said.

Following the feedback on the green paper, the Natural Resource Fund Bill was tabled in parliament at the end of November 2018 and was passed in January 2019. According to the government, Guyana is the only country to have established sovereign wealth fund legislation ahead of resource extraction.

The Bank of Guyana has been mandated by the NRF Act to ensure the fund is “managed prudently”.

New York Fed expands year-end repo operations

By Central Banking Newsdesk | Official Record | 13 December 2019

More cash to be made available both overnight and in term repos

The Federal Reserve Bank of New York is ramping up the liquidity it will offer through its repo facilities around the new year, after earlier operations showed banks bracing for a cash crunch.

From now until the end of the year, the New York Fed will offer $120 billion a day in its overnight operations, rising to $150 billion for the operation from December 31 to January 2.

Additionally, it is offering $50 billion in a 32-day term operation to be held on December 16. A previous term operation that spanned the year end saw demand close to $50 billion despite only $25 billion being on offer.

“The desk intends to adjust the timing and amounts of repo operations as needed to mitigate the risk of money market pressures that could adversely affect policy implementation,” the New York Fed said in a statement on December 12.

Funding can be volatile around the end of the year as many banks choose to hold on to their liquidity for regulatory purposes rather than offering it to markets.

Ghana launches push to turn banking sector green

By Central Banking Newsdesk | News | 13 December 2019

New sustainable principles address seven areas of social and environmental issues

The Bank of Ghana has urged banks to implement environmental and social risk management policies, as part of a broader effort to clean up the banking sector.

The central bank has published an extensive set of sustainable principles following an increase in lending to areas which have adversely affected the environment and social standards.

The seven principles, the central bank says, will be applied across five sectors of the economy and will be enforced by the Sustainable Banking Principles Committee, which was established in 2015.

The principles will provide guidance to banks on issues including “human security”, anti-money laundering, social responsibility, transparent communications and disclosure, reputational risk and climate change.

In addition to environmental and social risk management, the central bank has also urged the banking sector to adopt polices focused on financial inclusion, gender equality and corporate governance.

Changing sector

Over the last decade, Ghana’s banking sector has grown quickly. According to central bank data, as of September 2019, Ghana’s banking sector held total assets of 115.2 billion cedis ($20 billion).

While the central bank acknowledged a lot of successful projects had been financed by the banks, there was an increased amount of lending allocated to less sustainable causes.

“Banks’ funding is often used for activities which impact adversely on the environmental quality and social standards,” the central bank says in the document.

The central bank now expects banks to identify and assess environmental risk exposures before looking at ways to mitigate them. Banks have also been asked to promote environmental and social practices within their own businesses.

Suggestions on how to reduce a bank’s carbon footprint listed by the central bank include reducing the use of lights and air conditioning, and minimising business travel. The regulator also suggests reducing the consumption of paper.

To ensure these practices are adhered to, the Bank of Ghana has recommended drafting a new code of conduct which would be adhered to by all bank staff. Banks could also appoint a ‘sustainability champion’, the central bank says.

Do not engage

Banks may incur reputational, legal or credit damage if they or their clients have poor corporate governance or weak ethical standards,” the central bank notes. Corporate governance comprises the third principle in the document.

The Bank of Ghana has provided a framework for banks to follow when addressing these concerns for new and existing clients.

For new clients, the central bank has advised firms that in cases where corporate governance is poor they may need to abandon the business opportunity altogether. Alternatively, banks may look to “restructure the size or tenure” of the transaction with the business and require the new client to adhere to a new “action plan” before the opening of an account or disbursing funds.

Existing clients however, banks can lean on existing loan documentation, the central bank says. This documentation “may state that a failure to comply with legislation constitutes an event of default, allowing the bank to demand repayment of sums owing”.

However, the Bank of Ghana also advises banks to get their clients to agree to a new action plan and – where needed – provide training to help employee’s spot poor governance and unethical behaviour in clients.

Balancing the scale

While much of the document lends itself to addressing environmental issues, two of the central bank’s principles focus on diversity within the workplace. “Inclusive participation in economic life is critical in building stronger economies,” the central bank says.

To combat gender inequality – an issue that plagues the entire banking sector, regulators say – the central bank has urged financial firms to pay their employees equally. Banks have also been asked to ensure existing and new workplace policies are “free from gender-based discrimination”.

The Bank of Ghana urges banks to remove unconscious bias from their recruiting processes. “Ensuring that a candidate’s gender is hidden when applications are reviewed” is a good place to start, the central bank says. Interview panels should also be made up of both men and women.

Assessing progress

While there is no obvious timeline for banks to implement the new principles, the Bank of Ghana will assess the implementation through three phases.

During the first phase, the central bank only expects banks to describe measures they have taken. This qualitative reporting will be submitted to the central bank for review. In the second phase, the central bank expects the banks to include evidence – this can be though data and select key performance indicators. In the third phase, banks will be expected to demonstrate their continued adherence and set new targets.

Latvian parliament approves Kazaks as next central bank governor

By Central Banking Newsdesk | News | 12 December 2019

Economist takes charge as government pursues reforms after money-laundering allegations

Latvia’s parliament confirmed Mārtiņš Kazāks as the next governor of the country’s central bank today (December 12), local media reported, as his predecessor prepares to face trial on corruption charges.

Kazāks has been a member of the Bank of Latvia’s five-member council since August 2018. Before then, he worked in both the private sector and in academia. He was the deputy chief economist for the Swedish-based lender Swedbank from 2010 until taking up the central bank role, and the chief economist for its Latvian subsidiary from 2005.

He was nominated for the post just over a week ago by Latvia’s five-party centre-right coalition government. In his nomination process, Kazāks stressed he had no links outside work with the current central bank governor, Ilmārs Rimšēvičs. Latvia is a eurozone member, and Kazāks will sit on the European Central Bank’s governing council. 

Kazāks has an undergraduate degree from the University of Latvia, and master’s and doctoral degrees in economics from Queen Mary University of London. He served as an assistant professor at the Latvian outpost of the Stockholm School of Economics from 1996 to 2008. He also held roles at a number of official bodies, including Latvia’s fiscal council from 2014 until the present.

The current Bank of Latvia governor, Rimšēvičs, is due to step down from his role on December 20 after three six-year terms in the role. Local media outlets report he is due to face trial on criminal charges. Rimšēvičs was arrested in February 2018, on charges that he demanded bribes from a bank executive in return for favourable supervisory rulings. He strongly denies all charges and has said he is being falsely accused by powerful vested interests in the banking sector.

Martins Kazaks

After his arrest, a Latvian court barred him from leaving the country or entering central bank premises. But that ruling was struck down by the European Court of Justice, which ruled that the local authorities had not provided proof that he had engaged in any malpractice. Latvia’s parliament voted no confidence in him, but he refused to step down, protesting his innocence.

Rimšēvičs’s arrest and the near-simultaneous accusations by the US Treasury that a large Latvian bank was carrying out massive money-laundering led the country’s authorities to make significant changes to the country’s financial regulators. Central bank chiefs can now only serve two consecutive terms of only five years, and can be dismissed if parliament finds evidence of gross malpractice.

The head of the country’s financial regulator, the FKTK, stepped down rather than re-apply for his job. The FKTK itself is likely to be taken under central bank control, under the terms of a draft law before the parliament.

Lagarde promises wide-ranging review of ECB monetary policy

By Dan Hardie | News | 12 December 2019

ECB to form digital currency task force as Lagarde calls for EU action on green finance

Christine Lagarde

Christine Lagarde made no surprise announcements in her first monetary policy announcement as president of the European Central Bank, keeping interest rates at their record low levels.

But she did signal that the ECB’s forthcoming strategic review of its policy framework would be a wide-ranging exercise, in her press conference today (December 12). She said the ECB would convene a task force on creating a central bank-issued digital currency, or “digital euro”, which should report in mid-2020. Lagarde also called for the European Union to make faster progress on environmentally-friendly finance.  

The former managing director of the International Monetary Fund gave a typically assured performance at her press conference. “I am neither a dove nor a hawk,” Lagarde said in response to a question about differing views on the ECB’s governing council. “I am trying to be an owl, which is often associated with a little bit of wisdom.”

The ECB’s statement slightly altered the terminology of the policy announcements from the last statements made by her predecessor, Mario Draghi. It said that the ECB expected policy rates “to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics”.

The main refinancing operations rate stayed at 0%, the interest rates on the marginal lending facility rate at 0.25%, and the deposit facility at –0.50%.

Lagarde rejected suggestions that eurozone inflation was failing to reach the ECB’s target. The various measures of inflation within the bloc were all heading in the right direction, Lagarde argued.

She also dismissed the notion that the eurozone was suffering a “Japanification” of protracted low growth. Credit conditions in the eurozone were very different from those in Japan, she said.

It was “misguided” to say that the collective action conditions imposed as part of the European Stability Mechanism’s funding were in any way unfair on Italy, or other eurozone countries, Lagarde added. If the ESM had existed earlier, the EU could have dealt much more effectively with the eurozone’s sovereign debt crisis, she argued.

The trade tensions between the US and other major economies were much less worrying than they had been a few months previously, the ECB president said. She also expressed the belief that the UK’s general election, held today, would make it plain which direction Brexit was heading. That would be a relief, she said.

Strategic review

Lagarde said the ECB would be examining several specific areas of monetary policy as part of its strategic review, including how it measured actual and expected inflation. The ECB needed to make sure all the possible different measures were consistent in the direction they moved, she said. Lagarde said the review would look at whether changes in the price of land or housing ought to be included in the target inflation measure used by the ECB.

She did not comment directly when questioned about a recent comment by Italy’s central bank governor, Ignazio Visco. The governor said he saw asset purchases as more effective than movements in policy rates.

The ECB president said she did not want to favour one type of monetary policy intervention over another. Lagarde said that all the components of the ECB’s monetary policy toolkit formed “a package”. Interest rates were meant to have their main influence on the short-term end of the yield curve, she said. Forward guidance had more of an impact on the medium-term yields, while asset purchases aimed at the longer-term end of the curve.

Asked whether the ECB would modify its communications policy to allow governing council members to express disagreement, Lagarde said the strategic review would permit a long, detailed discussion of how the ECB met its goal of price stability. But she said that once agreement had been reached, she expected governing council members to uphold their line.

Several observers, including former Central Bank of Ireland governor Patrick Honohan, have expressed doubt over whether the ECB’s communications model is working. It was long accepted that only the president of the ECB spoke for the bank in public on its monetary policy decisions. But, Honohan recently told Central Banking, this process was now breaking down, with governing council members expressing different public opinions on policy.

Digital currency

The ECB needed to be “at the forefront” of creating central bank-issued digital currency, if such a thing proved possible, Lagarde said. She said the ECB was assembling a task force to look at the possibility of creating a “digital euro”, saying it would try to report by 2020.

Lagarde said it would look at what the currency’s aims would be, citing a number of possible goals, including better financial inclusion and lower costs. The task force would also have to look at the technical means for issuing such a currency, she said, adding that these were not straightforward. The ECB would collaborate with other organisations working in the field, including the UK and Canadian central banks, she said.

Lagarde said of the emerging field of digital assets, stablecoins seemed to hold more promise than bitcoins. The ECB also needed to do more to encourage Eurosystem members to use the bloc’s existing electronics payment systems, Lagarde argued. Some central banks were doing less than others in this field, she said. Lagarde paid tribute to the work of the ECB governing council member Benoît Cœuré, who she said had played a key role in exploring the possible role of digital assets. 

Environmental policy

Lagarde also confirmed that the strategy review would look at how the ECB could address climate change and other environmental problems. She gave a warm welcome to the “Green Deal” of proposed environmental policies for the EU, which was unveiled by the European Commission on December 11. She said she was “very pleased” by the ambition of the package announced by EC president Ursula von der Leyen.

But she also expressed disappointment that the EU’s member states had yet to agree on a “green taxonomy” for financial assets. The proposed taxonomy would mean that the EU had agreed ratings for how environmentally friendly different assets were. Lagarde said she had hoped that the taxonomy would be a “done deal” by December 11 and that she “was very disappointed to hear that it is not”. She called on the EU’s governments to reach agreement on a “green taxonomy” of financial assets, saying this would be a great help to the ECB’s work.

Turkish central bank slashes rates for fourth time straight

By Central Banking Newsdesk | News | 12 December 2019

Move was larger than many had expected, and comes as inflation re-enters double digits

Central Bank of the Republic of Turkey. Photo: CBRT

The Central Bank of the Republic of Turkey (CBRT) has slashed a further two percentage points from its main rate, despite a recent surge in inflation.

The move continues the aggressive easing cycle the central bank has pursued since the summer. When Murat Uysal took over as governor in July, the policy rate was 24%. Following today’s decision, it now rests at 12%.

The consensus view among economists had been for a 150-basis point cut.

In a statement, the monetary policy committee said there had been a gradual improvement in the economy, but added that investment demand remains “weak”, while the gloomy global outlook is weighing on Turkish exports. It said the inflation outlook was improving.

“At this point, the current monetary policy stance is considered to be consistent with the projected disinflation path,” the committee said in a statement.

Inflation climbed back into double digits in November, rising from 8.6% to 10.6%. However, this was below expectations and directionally consistent with the CBRT’s latest forecast, published on October 31, which envisaged inflation rising somewhat by the end of 2019 due to base effects.

The forecast implies inflation will begin to decline again in 2020, though it may not reach the 5% inflation target until late 2021.

“Recent forecasts suggest that inflation is likely to materialise close to the lower bound of the October inflation report projections for the end of the year, with risks around the disinflation path for 2020 being balanced,” CBRT policy-makers said.

Analysts at ING said the lower-than-expected inflation number in November gave the CBRT more room to act. However, they had expected a more cautious 100bp cut by the central bank today.

Muhammet Mercan, chief economist for Turkey, said in a note that there were risks to the CBRT’s approach, including the “still-challenging inflation outlook” with expectations that are “not well anchored”, as well as the “fragile macro backdrop with ongoing high dollarisation”.

However, the economy was strengthening, he said, and the fourth quarter looked “bright”. Growth returned to positive figures in the third quarter, rising 0.9% year on year, after three quarters of contraction.