Tuesday, October 19

Lira drops to near record low after Turkey cenbank plows on with cuts

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LONDON — Turkey’s central bank unexpectedly slashed its policy rate by 100 basis points to 18% on Thursday, sending the lira to near a record low.

Below is analyst reaction:


“The CBRT’s (central bank’s) recent messaging about shifting focus to core inflation suggested plans to start the easing cycle earlier than many had anticipated, but most expected rates to remain unchanged for at least another month.

“Today’s rate cut pushes real policy rates well into negative territory, and the accompanying statement has dropped the mention of maintaining a tight policy stance. Overall, this will not help the CBRT’s already fragile credibility, and the market reaction is likely to be quite severe .”


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“The 100-basis-point cut is shocking.

“The Turkish central bank does not have sufficient credibility to control or change the narrative, and to tell the market that we should focus on core inflation, because it has not been particularly successful in the past in bringing inflation in line with its 5% target .

“So this sharp fall in the value of the lira is a clear signal from market participants that the Turkish central bank could be making a policy mistake at a time when headline inflation is so high and inflation is likely to end this year higher than the official CBRT forecast.

“Given that the lira is even more vulnerable and may weaken further, this will have inflationary consequences, which means that the current end-year forecast on inflation is even less realistic.”


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“Ridiculous move by the CBRT – but not unexpected. Erdogan gets what Erdogan wants. But inflation is rising and yet they are cutting rates. The CBRT is taking a huge risk with the exchange rate.”


“People were set up to be short the currency, there were the comments you had from Erdogan and the whole story of the conflict with the central bank. Obviously the currency has weakened and it will weaken further, but I don’t think you are going to see it blow up completely because there was some positioning for this.”


“Erdogan gets his way with surprise rate cut… We think that further aggressive easing is likely over the next year.”


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“A few factors seem to have swayed the central bank to commence an easing cycle today. The first is the further decline in core inflation last month, to 16.8% y/y – CBRT Governor Sahap Kavcioglu had recently emphasized the’importance of core inflation indicators’ when determining the monetary policy stance.”

“The second is that policymakers seem to be concerned about the impact of the tight policy stance on activity. The latest hard activity figures showed that the economy made a soft start to Q3. Finally, Mr. Kavcioglu will have been well aware of what happened to previous CBRT governor’s that defied President Erdogan’s desire for rate cuts and may have moved on policy to save his job. (Reporting by Ali Kucukgocmen, Jonathan Spicer, Susan Mathew, Marc Jones and Karin Strohecker; Editing by David Evans and Catherine Evans)


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