Dec 12 2018

Too soon for Turkey to cut interest rates – FT

A decision by Turkey’s central bank to lower interest rates at a meeting on Thursday would be premature and threaten another sell-off in the lira, Colby Smith wrote in the Financial Times.

Turkish inflation has slowed to 22.6 percent in November from a 15-year peak of 25.2 percent the previous month. That has stoked fears that the central bank will reduce its main interest rate of 24 percent, Smith, a former Marjorie Deane Fellow at the Economist, said in an analysis for FT Alphaville, the newspaper's daily commentary service.

At the heart of investors’ concerns are credible doubts about the central bank’s independence. Turkish President Recep Tayyip Erdoğan has repeatedly called on policymakers to lower rates and his interference helped send the lira to a record low in August. A rate hike of 625 basis points in September re-established some of the bank’s credibility, but fears linger, Smith said.

“If they cut too early, I think the lira melts and this would just send the economy into a death spiral… It could also be terminal for the AKP's [Erdoğan's party's] chances in local elections”, said Tim Ash of London-based hedge fund Blue Bay Asset Management, according to Smith.

Reducing interest rates too early would show investors that Erdoğan has still failed to learn a key lesson – that his interference caused the currency crisis earlier this year, said Charlie Robertson, an economist at Renaissance Capital.

After sliding more than 45 percent to its record low of 7.22 per dollar, the lira has since firmed. It traded flat at 5.36 against the U.S. currency on Wednesday.