Turkish lira falls on expectation of another big rate cut

(Updates story to correct time of rates decision in the final paragraph.)

Turkey’s lira fell on Thursday as traders predicted that the central bank’s Monetary Policy Committee will cut rates more than economists expect.

The lira was down 0.2 percent at 5.76 per dollar at 11:12 a.m. in Istanbul, taking losses for the year to about 8 percent. The currency lost 28 percent of its value in 2018.

Turkey’s central bank is widely expected to cut rates by 250 basis points or more at Thursday's meeting, according to several polls of economists.

But the swap market is indicating a rate cut of between 300 and 350 basis points, Reuters reported on Thursday, citing its own data. Seven traders expected a reduction of between 300 and 400 basis points, the news wire said.

The central bank lowered borrowing costs by 425 basis points to 19.75 percent at the last MPC meeting in July. Since then, annual inflation has slowed to 15 percent from 16.7 percent, according to official data. Meanwhile, global central banks have announced easing cycles that help emerging markets reduce their own lending costs.

The central bank is expected to reduce rates by 500 basis points, the pro-government Yeni Şafak newspaper said earlier this week, without citing anyone.

President Recep Tayyip Erdoğan said at the weekend that Turkey will slash rates and slow inflation to single digits in a short time. Erdoğan promotes an unconventional theory that lower interest rates lead to slower inflation.

Investors in Turkey warn that cutting rates too far and too fast could spark a run on the lira, destabilise the economy and stoke inflation.

The MPC decision will be announced at 2 p.m. local time in Ankara.