Jul 25 2019

Markets await Turkish central bank’s rate cut

Turkey’s central bank is expected to announce its new benchmark rate at 1200 GMT on Thursday after the meeting of the monetary board under the freshly appointed governor Murat Uysal.

The central bank has kept the benchmark lending rate on hold at 24 percent since September, when it hiked it by 625 basis points to prevent a full-blown financial crisis. The lira hit record lows last year due to rising inflation and spurred by U.S. limited sanctions over the detention of an American pastor.

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. The economy expanded 1.27 percent in the first quarter of 2019, after two quarters of negative growth. The lira has been the best performer of all currencies versus the U.S. dollar over the last six weeks, gaining about 8 percent, Bloomberg said on Wednesday. 

Therefore economic data suggests a potential rate cut, but economists are uncertain about its size. 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. 

Bloomberg said the central bank’s decision would be a test for the country’s political and economic direction. It will be Uysal’s first test after the President Recep Tayyip Erdoğan removed the former governor Murat Çetinkaya for failing to obey the government’s request for rate cuts. 

“Fortunately, Turkey probably needs rate cuts,” Bloomberg said. “However, upward inflation pressure is likely to resume before the end of the year, so the easing window is short,” it said.

Erdogan’s policy position seems to favour a one-off massive reduction. But such a monster rate cut could shock the lira, potentially revive last year’s currency crisis and send inflation back up again, Bloomberg said

“The central bank might set aggressive monetary easing in motion this week, but we doubt it will be able to keep up with Erdogan’s rate expectations. The continued erosion of institutional credibility and Erdogan’s increased interference in monetary policy could also unnerve financial markets and lead to another run on the lira, despite a more favourable global backdrop,” Bloomberg quoted economist Ziad Daoud as saying.

The central bank also needs to consider potential problems in Turkey’s foreign policy, particularly the results of Ankara’s decision to acquire Russian S-400 missile systems. Washington in response removed Turkey of the joint production programme of F-35 jets, while it also halted the delivery of 100 F-35 stealth fighters to the country. Turkey also risks further U.S. sanctions under the Countering America’s Adversaries Through Sanctions Act (CAATSA).

U.S. State Department spokesperson Morgan Ortagus commented on the possible sanctions on Thursday, indicating that Washington was still carefully considering its next move regarding the CAATSA measures.

"Sanctioning a NATO ally is very very serious action," Ortagus said.

Sanctioning Turkey has bipartisan support in the U.S. Congress, though President Donald Trump is said to oppose the idea.

Ahmet Akyıldız, a researcher in the Private Company Economic Research Department MENA at Swiss Business School, said in the pro-government newspaper Daily Sabah that the central bank should leave aside foreign policy risks and immediately support an interest policy that is real-sector friendly. 

“As someone who has been fully supporting the central bank's interest corridor for the past three years, I think it is about time that they loosen the valves. We need to remind readers that each country that acts extra cautiously will suffer the costs in some way,” he said.