Turkey Rate Shock Imperils Reserves, Hurts Credibility: Analysts

Turkey Rate Shock Imperils Reserves, Hurts Credibility: Analysts

Turkish central bank Governor Sahap Kavcioglu’s unexpected interest-rate cut has damaged his credibility and fueled concerns over further weakness in the lira, according to strategists and analysts.

“Today’s move will have destroyed the credibility that Mr. Kavcioglu had built up over the past six months,” said Jason Tuvey, senior emerging-market economist at Capital Economics. The Monetary Policy Committee reduced its key one-week repo rate by 100 basis points to 18%. Only one of the 23 economists surveyed by Bloomberg anticipated a cut, predicting a reduction of 50 basis points. 

The rate cut sent the lira to a record low against the dollar and made it the worst-performing emerging-market currency this year. The yield on 10-year government bonds soared by the most since March 22, when the ouster of the central bank’s former investor-friendly governor triggered a selloff in the country’s assets. 

Here’s what some market watchers are saying about Thursday’s decision: 

Jason Tuvey (Capital Economics): 

  • “Mr. Kavcioglu will have been well aware of what happened to previous CBRT governors that defied President Erdogan’s desire for rate cuts and may have moved on policy to save his job.”
  • “Additional aggressive easing lies in store over the next year.”

Ima Sammani (Monex Europe): 

  • “Today’s decision is a large concern for the CBRT’s credibility, and the lira’s price action is telling of this. USDTRY pair looks vulnerable with the 9 level being the next breakthrough in the coming weeks.”
  • “This becomes especially relevant when inflation continues to print higher in September, while negative real rates are a realistic prospect for the medium-term as well if the TRY depreciation filters through to inflation and the Turkish economy’s structural price growth in turn snowballs into an even weaker lira.”

Piotr Matys (InTouch Capital): 

  • “The CBRT may try to impose its view on the market and cut rates further in the coming months, but it’s unlikely to work, as the sharp spike higher in USDTRY illustrates.”
  • “If the selling pressure on the lira prevails, the central bank may start burning FX reserves to offset the negative impact of lower interest rates. When reserves fall to dangerously low levels -- in tandem with interest rates -- the CBRT may opt to stabilize the lira with a rate hike. We’ve seen this before and it always ends in the same way.”

Per Hammarlund (Skandinaviska Enskilda Banken AB): 

  • Following a sharp slowdown in money supply and credit growth, “inflation was likely to come down as a result later this year or early next year. Now they risk throwing it all away by cutting prematurely.”

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