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Turkish rate cut no longer unthinkable as lira comes raging back

The dovish turn by global central banks could tempt Turkey to follow suit.
People wait to change money at a currency exchange office in front of the under-construction, Taksim Square Mosque in Istanbul, Turkey. Picture: Chris McGrath/Getty Images Europe

Having already laid the groundwork in April for a softer stance by removing a commitment to tighten monetary policy if necessary, Turkish central bank Governor Murat Cetinkaya is now overseeing an economy with a rising currency as the Federal Reserve and European Central Bank sound more open to stimulus.

Those gains in the lira may be enough to prompt policy makers to cut interest rates Wednesday, especially now that a slowdown in inflation is becoming entrenched. Adjusted for prices, interest rates in Turkey are about double the level among peers such as Russia and South Africa.


Most economists still predict Turkey’s benchmark rate will stay at 24% for a sixth straight meeting. But the cost of borrowing lira for a year using using cross-currency swaps extended its longest stretch of declines on record this week, a sign that some traders are positioning for a rate cut.

“We expect a significant drop in annual inflation in June on the back of the base effect, which makes the case for a measured rate cut,” said Erkin Isik, senior economist at QNB Finansbank who sees a decrease of 50 basis points. Currency risks are on the decline in emerging markets, given the increasing “possibility of supportive monetary policy practices by the central banks of developed countries,” he said.

Three of 25 analysts surveyed by Bloomberg say the Monetary Policy Committee will start unwinding September’s 625 basis points of tightening on Wednesday.

Turkey’s consumer inflation, which slowed for a second month in May to an annual 18.7%, is likely to be in single digits in September to October, according to Treasury and Finance Minister Berat Albayrak.

The lira has rallied more than 6% against the dollar since May 9, the most in the world. Calculations by Credit Suisse Group AG show rate markets are pricing in a 20% probability of a cut of one percentage point at the coming meeting or a chance of 10% that the benchmark will be lowered by 200 basis points.

Beyond the prospects for the currency and inflation, Turkey’s central bank also has to contend with risks far outside its control. A controversial rerun of Istanbul elections in less than two weeks, compounded by tensions with the US, could plunge the economy into renewed turmoil.

A rate cut this week may be premature, according to economists at Nomura International Plc and Deutsche Bank AG, ranked by Bloomberg as the most accurate forecasters of Turkish rate decisions.

The central bank wouldn’t endanger “the recent lira stability by cutting the policy rate at a time when both domestic and international political uncertainties are so high,” said Nomura’s Inan Demir.

In a sign the market remains jittery, the lira weakened on Tuesday, falling as much a 1.2% against the dollar before trimming its decline.

Monetary easing is more likely in the second half “as further disinflation in the pipeline would make them less concerned about the impact of their policy actions on the lira,” said Kubilay Ozturk, an economist at Deutsche Bank.

© 2019 Bloomberg L.P

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