Turkey central bank seen slashing rates by 500 basis points – report

Turkey’s central bank is expected to slash interest rates by 500 basis points at a meeting on Thursday, the pro-government Yeni Şafak newspaper reported.

The central bank, emboldened by a stable lira and monetary easing across the globe, will probably cut rates to 14.75 percent from 19.75 percent, Yeni Şafak said without citing anyone.

With inflation expected to slow to around 10 percent in September, the central bank will be halving the difference between current interest rates and inflation with the rate cut, the newspaper said.

There will be no meaningful negative effect on the lira’s value against the dollar because investors are already pricing the rate reduction in, Yeni Şafak said. In July, when rates were unexpectedly reduced by 425 basis points to 19.75 percent, the lira strengthened, it said.

The cut in interest rates comes after President Recep Tayyip Erdoğan said he expects the central bank to act on rates and that inflation will slow in parallel, the newspaper reported. Erdoğan said Turkey would reduce inflation and interest rates to single digits in a short time.

Yeni Şafak's prediction compares with expectations of a rate reduction of between 250 basis points and 300 basis points in various polls of economists. The pro-government Sabah newspaper reported on Monday that the bank will cut interest rates by at least 250 basis points. 

Dutch bank Rabobank said this week that it sees a rate reduction of 300 basis points.

“However, we are not comfortable with such a rapid pace of monetary policy easing," it said in a report.

Investors are concerned that a rapid fall in interest rates will lead to losses for the lira against major currencies. Concerns about an overheating economy, spurred by government stimulus efforts, and Erdoğan's calls for an easing in monetary policy, helped spark a currency crisis last summer.

The lira fell 0.1 percent to 5.75 per dollar at 10:33 a.m. local time in Istanbul, taking losses this year to almost 8 percent. It fell by 28 percent against the dollar in 2018.

Erdoğan replaced the governor of the central bank in July for failing to respond to government requests to lower interest rates. Two new deputy governors of the central bank were appointed last week.