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bne October 2019 Companies & Markets I 19
bne:FX
Rate-setters go for another dizzying descent
Akin Nazli in Belgrade
Turkey’s central bank slashed its key interest rate by
a more-than-expected 325 bp on September 12, mean- ing that the national lender has now brought in easing of 750 bp overall since the president fired its governor for not cutting rates soon enough or fast enough.
The cut introduced by the central bank’s monetary policy com- mittee (MPC) brings the main policy rate (one-week repo auction rate) to 16.50%, the authority announced in a written statement.
The market consensus prior to the announcement was that the cut would be in the 250-275 bp range. Prior to the replace- ment of the central bank governor, there were no market expectations that the benchmark rate could fall from 24% to 16.50% via just two MPC meetings, but Erdogan has made regular and ‘noisy’ statements in recent weeks outlining how he expected major monetary loosening. The next MPC meet- ing is scheduled for October 24, while the last one of the year is to take place on December 12.
Explaining its latest monetary standpoints following the communication of the rate cut, the Central Bank of the Republic of Turkey (CBRT) caused some amusement and confusion among market participants by issuing a statement saying it was moving cautiously.
"I love how in cutting policy rates 325bps, the CBRT argues the need for a cautious monetary stance," said Timothy Ash, an emerging markets strategist at BlueBay Asset Management.
“Not sure they signalled slower easing at all. If inflation hits single digits in October, if the Fed and ECB are still in roll over and tickle my chest mode with liquidity, then the CBRT will just not be able to resist giving Erdogan what he wants,” he added on Twitter.
Shifted expectations
In a note to investors, Jason Tuvey of Capital Economics observed: “Comments from President Erdogan over the week- end had probably prompted market participants to shift their expectations towards an even steeper rate reduction.”
He added: “Ironically, falling inflation, coming shortly after steep interest rate cuts, will only reinforce President Erdogan’s unorthodox view that looser monetary policy is needed to bring down inflation. And the favourable market
reaction to the rate cuts at the last two meetings means that the CBRT is likely to feel comfortable that it can press ahead with rate cuts.”
“The Turkish central bank delivered another larger-than- expected interest rate cut today and we now expect the one-week repo rate to reach a trough at 12.50% (previously 16.00%),” Tuvey also said in his research note entitled “CBRT: more near-term rate cuts, but hikes loom in 2020”.
Bloomberg, meanwhile, said in a report entitled “Turkey Signals Slower Easing Ahead After Another Jumbo Rate Cut” that the central bank had indicated it is set to slow the pace of monetary easing as it navigates the conflicting demands of the presidency and the markets.
Ercan Erguzel of Morgan Stanley responded to the second big rate cut in a row by saying in a note: “We read this [CBRT monetary policy] statement as a signal that next moves in the policy rate are more likely to be measured compared to the last two big cuts.”
Erguzel expected to see a 75 bp cut on October 24. He main- tained his end-year policy rate forecast at 15.75%.
September 12 also saw the European Central Bank (ECB)
cut its deposit rate to a negative 0.5% from a negative 0.4%. Additionally, the ECB said it would re-launch €20bn worth of monthly bonds purchases in a restart of its quantitative easing programme, starting from November.
Turkish Central Bank's Policy Rates
Main Policy Rate (one-week repo/Blue) - CPI inflation (Green) - Weighted Average Cost of Funding (Red) (%)
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