The median consensus on Bloomberg anticipates a 100bp rate cut by the Turkish central bank (CBT) today, to 39.50% repo rate. But there is a wide range of analyst forecasts – ranging from unchanged to 250bp rate cut. We lean towards 150bp rate cut to 39.0% as base-case, but there is fundamental reason to pick that number – a 100bp cut or a 200bp cut would not really constitute a ‘surprise’ in any sense, Commerzbank’s FX analyst Tatha Ghose notes.
USD/TRY is about to breach the 42.00 level soon
“There are two clearly conflicting factors behind rate cuts. Inflation is not really decelerating in a convincing manner. Hence, rates should not be cut. On the other hand, CBT probably sees no other option simply because of the length of time that interest rates have been held high. Because of this, rates have to be cut. Sure, CBT could skip one month here or there. But that would serve little purpose.”
“Turkish inflation is not improving in a convincing manner. The casual observation that ‘inflation is gradually moderating from high levels’ is based on year-on-year rates of increase and is misleading. We hear similar statement from many EM central banks, but this representation is simply bad analysis. CBT started publishing the seasonally-adjusted month-on-month rate of price change for a reason – because that measure much better represents underlying inflation dynamics. On that basis, price changes are still annualising to c.30%. Sure, this is slower than at the peak. But that is irrelevant.”
“CBT’s monthly survey indicates that market participants expect the central bank to continue cutting interest rates. This is probably because observers realise that CBT may have no option. The economic policy team probably senses that President Tayyip Erdogan’s patience with conventional policy will run out if rates had to be kept high any longer. Therefore, CBT is adopting the language to justify cutting rates while promising to use secondary policy tools in case inflation were to re-accelerate. In conclusion, the fundamentals for the lira exchange rate are deteriorating. As of writing, it appears that USD/TRY is about to breach the 42.00 level soon.”
