What Is Turkey’s Reasonable Real Rate as It Cuts? Take Your Pick

(Bloomberg) -- Turkish central bank Governor Murat Uysal has vowed to preserve “a reasonable rate of real return” for investors as he cuts borrowing costs for the first time in three years.

Pinpointing where that level is, however, is a challenge.

If history is any guide, Turkey's policy interest rate adjusted for inflation could fall some 400 basis points to just above zero. After all, that's been the average going back to 2011.

But if what Uysal has in mind is Turkey's standing compared with peers -- and he suggested as much at the quarterly inflation briefing on Wednesday -- his country has less room to ease policy. At just over 400 basis points, the real rate is around 70 basis points above the average for major emerging markets.

Taking Turkey's credit risk into account narrows this window even further.

Adding to the confusion is that traders are not seeing eye-to-eye over how much easing has already been priced in. Some are taking the one-week repo rate as a starting point and others the one-week swap, which is trading 325 basis points lower at around 16.5%.

The bottom line for Uysal -- who was controversially installed to lead the central bank weeks ago -- is that it will be hard to please everyone, especially with President Recep Tayyip Erdogan already saying that last week's record 425-basis-point cut “is not enough.”

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, Paul Abelsky

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