Question Is No Longer If Turkey Will Cut Rates, It's How Much

Updated on
  • Economists see cut in overnight lending rate: Bloomberg survey
  • Central bank's interest rate decision scheduled for Wednesday

If Turkey cuts interest rates this week, it’ll be the least surprising central bank decision in more than three years. The big unknown is by how much.

All 21 economists surveyed by Bloomberg see a decline in the overnight lending rate on Wednesday, the first unanimous consensus of a cut in the upper band since November 2012. But with the decision scheduled one day after Murat Cetinkaya becomes governor, no one knows if he’ll succumb to calls for steep reductions.


President Recep Tayyip Erdogan and some government officials have said the central bank needs to cut borrowing costs radically to give Turkey’s $720 billion economy a jolt. Yigit Bulut, the president’s chief adviser, said policy makers will probably reduce the upper band as much as 75 basis points. That’s 25 basis points more than economists’ median estimate and about 30 basis points more than what traders have priced in as of 5:55 p.m. in Istanbul, according to a key market indicator.

The lira can cope with a cut of as much as 50 basis points, Piotr Matys, an emerging market foreign exchange strategist at Rabobank in London, said by e-mail. “A fairly aggressive cut of 100 basis points or more would spook the market and would be counter-productive as it would cause a strong correction in the lira against the U.S. dollar,” he said.

Swaps that gauge one-month interest-rate expectations for the overnight-lending rate in May see a 43 basis point drop, and a total of more than 90 basis points over the next two months, the data show.

A steeper than expected reduction to the upper band would make the lira less attractive for carry traders who borrow in low-yielding currencies and buy assets with higher returns.

Policy makers last month reduced borrowing costs for the first time in more than a year. The relative strength of the lira, which rose 2.7 percent this year, a rally across emerging markets sparked by the Federal Reserve’s decision to slow the pace of rate increases, and better-than-expected inflation data gave the central bank room to cut rates.