Markets were on edge headed into today’s CBT meeting.
After all, it was just three weeks ago when Turkish President Recep Tayyip Erdogan unceremoniously ousted his central bank governor for the high crime of not cutting rates. Cetinkaya’s dismissal dashed hopes that Erdogan had been humbled by the Istanbul mayoral loss and presaged the imminent return of Erdogan-o-mics, as the autocrat’s unorthodox views about FX, rates and inflation are not-so-affectionately known among EM watchers.
Thanks to resurgent domestic equities, a dovish Fed and a US president that’s inclined to take it easy on Ankara despite the procurement of Russian-made S-400 missile systems which should have triggered harsh US sanctions, Erdogan has some room to maneuver. Throw in a more benign macro outlook and the case is further made, or at least as far as Erdogan is concerned it is. This is, after all, a man who once dubbed interest rates “the mother and father of all evil”.
Estimates for the size of Wednesday’s cut varied wildly from 50bp to 800bp. The official number is 425bp. That’s a larger move than consensus (250bps). The lira initially dipped, but quickly recovered to rally.
This is, by definition, the first decision under Cetinkaya’s replacement and it goes without saying that he had to deliver something sizable. The market was priced for 300bp, so facially this is a surprisingly large move, but anyone with any sense probably baked in a subjective “Erdogan factor”, so to speak.
“I think they wanted to break the 20% barrier. I thought they would do 450bps, so not far wrong”, BlueBay’s Tim Ash said after the announcement. “If lira holds relatively well they will continue cutting aggressively in my view”, he went on to say. “Murat Uysal was given a mandate to cut – or move aside for someone who would – and he cut to script”.
CBT cited the likelihood of developed market easing in their decision. “Recently, weaker global economic activity and heightened downside risks to inflation have strengthened the possibility that advanced economy central banks will take expansionary monetary policy steps”, the bank said, in the statement, adding that the domestic inflation outlook “continues to improve”.
Needless to say, the jury is still out on how the market will ultimately judge this move. As Barclays wrote on Sunday, “a significantly larger-than-expected cut would be seen as a policy mistake, resulting in… renewed market anxiety about the CBRT’s independence [and] Erdogan recently indicated that the CBRT may have more frequent MPC meetings in a year, which would make it easier to deliver more substantial easing, albeit at a more gradual rate”.
After Thursday’s CBT decision, Turkey no longer sports the highest real rate in the world.
That leaves the currency more vulnerable should things get dicey again.
The Borsa Istanbul entered its second bull market of the year last week, a testament to just how manic 2019 has been for the country and anyone who’s invested in Turkish assets. Don’t expect the rollercoaster to end soon.