Erdogan Aides Drop Demand for Cut Ahead of Turkey Rate Decision

  • Yigit Bulut warns traders against taking reduction for granted
  • Majority in survey expect 25bp cut to overnight lending rate

Turkish interest rate decisions are usually preceded by officials railing against a “foreign lobby” opposing the government’s desire for lower borrowing costs. This time, the rant has been put on hold.

Ahead of Thursday’s monetary policy committee meeting, two of President Recep Tayyip Erdogan’s senior aides issued a rare caution that the central bank could keep lending rates the same after seven consecutive cuts. That’s an outlier view shared by only four respondents, including Goldman Sachs and BGC Partners, in a Bloomberg survey of 23 economists.

Policy makers have lowered the overnight rate at every monthly meeting since March amid constant calls from the government for easier credit conditions to revive Turkey’s slowing economy. But the lira has weakened more than 4 percent since the last decision on Sept. 22, and the rhetoric from Erdogan’s administration has also shifted. The central bank “will pass this month if it needs to pass this month,” chief adviser Yigit Bulut said on Tuesday.

“What has changed is that we observed more prudent remarks from the government than usual regarding the central bank’s decision,” said Finansbank AS chief economist Gokce Celik, who revised her prediction from a cut to a hold after Bulut’s comment. “This indicates less political pressure on the bank.”

‘No Auto-Pilot’

The lira surged after Bulut’s comments to state-run broadcaster TRT, trading 1 percent stronger at 3.0633 per dollar at 7:35 p.m. on Wednesday -- making it the world’s best-performing major currency. Cemil Ertem, another chief adviser to Erdogan, said last week that monetary policy wasn’t on “auto-pilot” for rate cuts, and that a lira weaker than 3.1 per dollar was unjustified.

The currency has slumped over the past four weeks amid growing expectations that the U.S. Federal Reserve will increase rates later this year, with the Turkish central bank seen heading in the opposite direction. Political uncertainty in Turkey after July’s failed coup attempt is also a key factor.

While easing access to credit remains an objective for the central bank, it may choose to do so without cutting rates this month, since a reduction now would limit its ability to respond to shocks, according to Goldman Sachs. Instead, Governor Murat Cetinkaya will probably use liquidity measures to ease access to credit, it said in a report.

Inflation Risk

Lowering banks’ reserve requirements is likely to be more effective than cutting the cost of cash the regulators provide to commercial lenders, it said.

The lira’s depreciation, as well as the recent recovery in commodity prices, may spur consumer inflation after it slowed last month and prompt a pause in the current cycle of rate cuts, Ozgur Altug, chief economist at BGC Partners in Istanbul, said by e-mail on Tuesday.

“The risk is that if the central bank cuts rates further, the lira’s depreciation might gain pace,” he said.

Even so, the median estimate in a Bloomberg survey is for a 25 basis point cut to 8 percent for the overnight lending rate, the upper of Turkey’s three main gauges. The bank is expected to keep its one-week repo and overnight borrowing rates unchanged at 7.5 percent and 7.25 percent respectively, according to Bloomberg surveys.

“With the Turkish economy losing more momentum in the third quarter and the disinflationary process continuing, it is reasonable to expect the central bank to trim the overnight lending rate by another 25 basis points,” Piotr Matys, a strategist for emerging-market currencies at Rabobank in London, said by e-mail on Wednesday.

— With assistance by Tugce Ozsoy

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