Economists uncertain about size of Turkish central bank’s Thursday rate cut - FT

There is an uncertainty over how much Turkey’s central bank will decide to cut its benchmark rate during a monetary board meeting on Thursday, the first one to be held under the new governor, the Financial Times said

Turkish President Recep Tayyip Erdoğan sacked the former governor Murat Çetinkaya this month, criticising him for declining the government’s requests for rate cuts. 

Analysts range wildly in their predications for how the bank’s new chief, Murat Uysal, will respond to pressure from Erdoğan to cut rates, the FT said. 

Polls of economists conducted by Bloomberg and Reuters showed median forecasts of a 250 basis point rate cut, but the predictions ranged from 50 to 800 basis points. 

The central bank has kept the benchmark lending rate on hold at 24 percent since September, when it hiked it by 625 basis points after the lira hit record lows spurred by a diplomatic spat with the United States. 

Inflation in Turkey increased to a 15-year-high above 25 percent in October and fell to 15.72 percent year-on-year in June, prompting expectations for a rate cut in the July 25 meeting.

“There is definitely an economic justification for a 300 bps cut. They would get away with 300 or 350 fairly easily,” said Yerlan Syzdykov, global head of emerging markets at asset manager Amundi. Société Générale analysts Phoenix Kalen and Marek Drimal told the FT a 300-basis point cut could be easily absorbed by the market.

But economists suspect Uysal might be pushed to adopt a more substantial rate cut. 

“If the central bank shocks the market and slashes interest rates by 600 bps or even 800 bps then it’s going to be counter-productive,” the FT quoted Piotr Matys, an emerging markets currency strategist at Rabobank, as saying. 

Matys said cutting the benchmark rate “too much and too fast” could exacerbate Turkey’s problems if there were a shift in global risk appetite or a geopolitical shock, such as the imposition of U.S. sanctions over Ankara’s decision to acquire Russian S-400 missile systems.