The Central Bank of the Republic of Turkey cut rates today by 75 basis points as the cutting cycle continues but at a dramatically slower pace than in 2019.
Today’s decision marked the smallest cut in policy rates under Governor Uysal since he was appointed governor in July.
The median forecast supplied to Bloomberg predicted a 75bps cut but expectations had been outstripped by the CBRT consistently since Uysal’s. A steep disinflationary channel experienced in 2019 paved the way for a sharp cutting cycle; rates fell by 1200bps over the course of the year. However, as the disinflationary channel begins to slow so must the CBRT’s cutting cycle.
The market’s biggest concern in 2020 is that given Erdogan’s pledge to achieve 5% economic growth, monetary policy may well be put under severe amounts of political pressure regardless of the economic data.
Although, the wording of today’s rate statement is key for supressing such fears and hence benefitting the lira’s rally. The statement read;
The Committee assesses that maintaining a sustained disinflationary process is a key factor 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
Reading between the lines, this more prudent stance by the CBRT in order to lower longer-term rates could be a key selling point to avoid political pressure from Erdogan, especially as the disinflationary channel begins to flatten.
Political interference in monetary policy and capital markets continues to weigh on investor sentiment with foreign holdings of Turkish assets declining. A more prudent and predictable monetary policy stance goes some way to trying to repair this, but with real rates now sitting in negative territory, the buffer to in lira markets has been eroded.
The initial market reaction has been mildly positive, somewhat cautious even, given that inflation is expected to pick up in the coming months.
This is far from over but today’s announcement gets Governor Uysal off to a good start in the new year.
Chart 1: TRY strengthens as the market deems the CBRT rate decision as credible, for now
Author: Simon Harvey, FX Market Analyst at Monex Europe.