Turkish central bank paving the way for rate cut, Nomura says

Turkey’s central bank is paving the way for a cut in interest rates, Nomura economist Inan Demir said, citing a more dovish statement by policymakers on Wednesday.

The central bank dropped a reference to maintaining tight monetary policy “until the inflation outlook displays a significant improvement”, meaning it may be gearing up to reduce the benchmark rate of 24 percent as early as July, Demir said in an e-mailed report.

“However, prospects for easing are very much “state dependent”, and ultimately we think it will be lira performance against substantial domestic and international political risks that will determine whether the Turkish central bank will find an opportunity to ease,” Demir said.

The central bank left its benchmark rate unchanged after a meeting of its Monetary Policy Committee on Wednesday. It had raised rates by 625 basis points to 24 percent in September to stave off a currency crisis brought on by a political crisis with the United States and concerns among investors about an overheating economy.

The government is now embroiled in a spat with the United States over its purchase of S-400 missiles from Russia, a deal that could prompt economic sanctions. A rerun of mayoral elections for Istanbul on June 23 is also causing political uncertainty.

The central bank may be forced to switch to a tightening bias on rates should the political backdrop deteriorate, Demir said.

Turkey’s central bank has kept rates on hold even as inflation slowed to 18.7 percent last month from 25.2 percent in October, which was the highest level in a decade and a half.

The lira dropped 0.4 percent to 5.83 per dollar at 12:30 p.m. local time in Istanbul on Thursday, taking losses this year to almost 10 percent. The currency weakened by 28 percent in 2018.