Turkey’s Captive Central Bank Delivers Another Large Rate Cut For Erdogan

After a four-day losing streak, The Turkish lira was gunning for a second consecutive daily gain on Thursday headed into a closely-watched central bank meeting at which Murat Uysal was expected to deliver a 275bps point rate cut.

President Erdogan has made it abundantly clear (even more so than usual) that he expects more easing, and Uysal did not disappoint. CBT cut rates by 325bps on Thursday.

Uysal delivered the largest cut in history shortly after being installed in July, after Murat Cetinkaya was unceremoniously ousted for refusing to ease fast enough to satisfy an impatient Erdogan.

To be clear, there was some scope for easing at this meeting – that is, this isn’t entirely down to Erdogan’s incessant badgering.

“Inflation continues to surprise (15% yoy in August) to the downside, providing room for the CBT to ease”, BofA wrote this week, adding that the “Turkey’s 4% real policy rate is wide to emerging market peers” who on average offer a 2% real interest rate.


For BofA, that provided “around 4% room for easing relative to the CBT’s end-year inflation forecast”. We talked about this earlier this week. The problem is that while there may be scope for looser policy in the near-term, over the longer haul the same issues are likely to pop up.

“Worryingly, over a longer horizon, the trend toward overly loose monetary policy risks exacerbating Turkey’s age-old vulnerabilities by fueling the twin dynamics of inflation and attendant currency weakness”, SocGen’s Phoenix Kalen warned. “These dynamics can wreak havoc on a highly leveraged economy, where both the private and public sectors are heavily reliant on FX-denominated financing”.

Read more: Turkish Lira Warily Eyes US Sanctions Threat, Erdogan Rate Cut Promises

On Sunday, Erdogan promised to lower rates into the single digits. “We are lowering and will lower interest rates to single digits in the shortest period”, the incorrigible autocrat said, in a televised weekend address. “After it falls to single digits, inflation will also slow to single digits”, he mused, reiterating one of the central tenets of his unorthodox view of economics.

Ankara is still at odds with Washington over the S-400 issue and earlier this week, Steve Mnuchin suggested sanctions are still an option, although as we saw in June when Donald Trump chatted with Erdogan at the G-20, the White House isn’t particularly inclined to punish Turkey for refusing to halt plans to purchases the Russian missile systems.

Looking ahead, SocGen’s Kalen cautions that “very loose monetary policy would render Turkish assets much more vulnerable to portfolio outflows, at a time when net capital flows and portfolio flows into Turkey have already sharply plummeted”.


She continues, noting that “2019 YTD net capital flows stand at USD6.7bn according to the latest data from the Institute of International Finance”. Annualized, that’s “nominally less than 15% of volumes earlier this decade [while] portfolio flows and data on foreign holdings of TRY-denominated government bonds offer up a similar message of a sharp reduction in foreign appetite for Turkish assets over recent years”.

Suffice to say Erdogan doesn’t want to hear any of that right now. Eventually, economic (and political) reality will catch up with him. That day isn’t today, though.

Indeed, the lira spiked after the decision. “CBRT cuts repo rate 325bps to 16.50%, so taking real rate to around 150bps now, but lira is rallying as relief that the CBRT did not cut more, i.e. 500bps as had been hinted at in local press”, BlueBay’s Tim Ash remarked.

Full statement

The Monetary Policy Committee (the Committee) has decided to reduce the policy rate (one-week repo auction rate) from 19.75 percent to 16.50 percent.

Recently released data indicate that moderate recovery in economic activity continues. In the first half of the year, the contribution of net exports to economic growth continued, while investment demand remained weak and the contribution of private consumption gradually increased. Goods and services exports continue to display an upward trend despite the weakening in the global economic outlook, indicating improved competitiveness. In particular, strong tourism revenues support the economic activity through direct and indirect channels. Leading indicators point to a partial improvement in the sectoral diffusion of economic activity. Looking forward, net exports are expected to contribute to economic growth and the gradual recovery is likely to continue with the help of the disinflation trend and the improvement in financial conditions. The composition of growth is having a positive impact on the external balance. Current account balance is expected to maintain its improving trend.

Recently, advanced economy central banks have started to adopt more expansionary policies as global economic activity weakened and downside risks to inflation heightened. While these developments support the demand for emerging market assets and the risk appetite, rising protectionism and uncertainty regarding global economic policies are closely monitored in terms of their impact on both capital flows and international trade.

Inflation outlook continued to improve. In addition to the stable course of the Turkish lira, improvement in inflation expectations and mild domestic demand conditions supported the disinflation in core indicators. In August, consumer inflation displayed a significant fall with the contribution of core goods, energy and food groups. Domestic demand conditions and the level of monetary tightness continue to support disinflation. Underlying trend indicators, supply side factors, and import prices lead to an improvement in the inflation outlook. In light of these developments, recent forecast revisions suggest that inflation is likely to materialize slightly below the projections of the July Inflation Report by the end of the year. Accordingly, considering all the factors affecting inflation outlook, the Committee decided to reduce the policy rate by 325 basis points. At this point, the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path.

The Committee assesses that maintaining a sustained disinflation process is the key for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery.  Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, the extent of the monetary tightness will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.

It should be emphasized that any new data or information may lead the Committee to revise its stance.

The summary of the Monetary Policy Committee Meeting will be released within five working days.


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