Turkey Surprises With Big Rate Cut Again as Erdogan Won’t Let Up

(Bloomberg) — The Turkish central bank delivered another interest-rate cut that exceeded forecasts, emboldened by the lira’s stability and egged on by President Recep Tayyip Erdogan’s calls for more aggressive easing.

The Monetary Policy Committee reduced its key rate on Thursday to 12% from 14% at this year’s last scheduled meeting. While economists surveyed by Bloomberg unanimously predicted a rate cut, expectations ranged widely, with most seeing a decrease of 150 basis points.

The MPC removed a phrase from its statement that said its stance was “to a large part” consistent with the the projected disinflation path, suggesting it could now move slower to loosen policy. The lira kept gains after the decision, trading 0.4% stronger against the dollar.

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Less than six months into his tenure, Governor Murat Uysal has rolled back most of the dramatic rate hikes used by the central bank to fight last year’s currency crisis, starting the unprecedented easing cycle with a record cut weeks after taking the job. Erdogan ousted his predecessor for not acting fast enough.

The latest move brings the cumulative easing under Uysal’s watch to 12 percentage points. The decision is a “mild surprise,” according to Guillaume Tresca, a Paris-based strategist at Credit Agricole.

“The central bank has to deliver,” he said. “It will continue to do so as long as the lira is broadly stable.”

‘Single Digits’

Just as he’s done ahead of all policy decisions since installing Uysal, Erdogan sounded off on monetary matters again in the days before this week’s meeting, saying “we will be moving to single digits in interest rates in 2020.”

What Our Economists Say…
“The latest reduction completely reverses the monetary tightening that followed last year’s currency crisis. But with inflation picking up, rate cuts will probably take a pause now until 2Q20.”

— Ziad Daoud

Erdogan’s fixation on low rates was hardly the only reason for easing, with the economy just beginning to gain momentum after a recession. Even as inflation bounced back in November, it didn’t heat up as much as expected, ensuring that before this week’s meeting, Turkey still boasted one of the highest real rates in emerging markets.

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Losing Appeal

Inflation began to soar in June 2018 after a crash in the lira touched off a surge in domestic prices across the import-dependent economy. After peaking at 25.2% last year, it plummeted into single digits before a pickup to an annual 10.6% in November.

Price growth is likely to end the year near the lower bound of the central bank’s October inflation projections, “with risks around the disinflation path for 2020 being balanced,” the MPC said on Thursday.

Meanwhile, policy makers have also increased the number of their meetings next year to 12, from eight in 2019, a decision that could allow them to move in smaller steps if they chase Erdogan’s goal of single-digit rates.

Until now, the lira has largely withstood the onslaught of rate cuts, its one-month implied volatility falling in December to the lowest in years. Still, worries abound among investors, with Turkey’s currency on track this month for the worst performance in emerging markets against the dollar.

“The plunge in Turkey’s real policy rate may leave assets vulnerable to capital flight, quickening the pace of the lira’s spot deterioration in 2020,” said Phoenix Kalen, a strategist at Societe General SA in London before the decision. “The more frequent opportunities to revise the monetary policy stance mean that there are fewer compelling reasons to take actions that may be difficult for the market to digest.”

–With assistance from Harumi Ichikura and Paul Wallace.

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