Responses from 15 economists surveyed by Reuters produced a median estimate of 50bp for the benchmark rate cut Turkey’s central bank is expected to announce on May 21 (at 11:00 GMT).
It would be the ninth successive cut made by the national lender, which has slashed its policy rate by 1,525bp since July last year, firstly in an ultra-aggressive attempt to pull the economy out of last year’s recession and, secondly, to battle the economic downturn caused by the coronavirus (COVID-19) outbreak.
Domestic demand, tourism and exports have all taken a big hit from the arrival of the pandemic in Turkey, prompting the central bank last month to reduce its end-2020 official inflation forecast to 7.4% from 8.2%. Despite import prices rising given the 13% depreciation in the Turkish lira (TRY) to date this year, driven by anxiety over fundamentals such as the burning up of foreign reserves to defend the lira and protect those under severe pressure from high foreign debt obligations, it is anticipated the regulator will see enough room to cut its policy rate.
In the Reuters poll, estimates for that cut ranged from a 25-point cut to 8.5%, to a 100-point cut to 7.75%.
The collapse in global oil prices are another factor that the central bank will cite in pushing inflation down in energy import-dependent Turkey.
The TRY hit an all-time low of 7.2690 versus the dollar earlier this month but, amid pressure put on offshore trading of the lira by Turkish officials, it has been rallying and by lunchtime on May 19 in Istanbul it was trading at around 6.80.
Bank of America’s Ferhan Salman was quoted by Reuters as saying the central bank sees room to loosen policy given its lower inflation forecast.
“We agree [that] low oil prices and weak demand mute FX pass-through to inflation. Weak demand also curbs producers’ ability to pass on cost changes to the headline,” he wrote in a client note, adding lockdowns could depress services inflation.
The central bank has also executed been engaging in quantitative easing (QE) in order to step up the battle against COVID-19 impacts. Its record-level bond-buying stimulus has included purchasing more than TRY40bn ($5.8bn) of government debt since the end of March, half of it from Turkey’s Unemployment Insurance Fund.
As of May 15, it held TRY65.2bn of bonds versus TRY19bn at end-2019. The regulator has doubled its effective limit on purchases for the year to 10% of total assets.
TD Securities said on May 18 that it was anticipating easing of 100bp in the policy rate, adding: “More importantly, we will be following closely the dynamic of the CBRT's [central bank’s] swap book. We think the lira will perform based on swap activity rather than CBRT's rate decision. We expect a minor negative reaction for TRY if the CBRT cuts 100bps as we expect, but [the lira] may recover shortly after.
“With three large swap redemptions this week, before and after the CBRT meeting, we will see how TRY reacts to them. A neutral reaction on 18 and 20 May will likely leave USD/TRY also relatively neutral to a CBRT cut.”
In a note, Muhammet Mercan, chief economist at ING Turkey, predicted that the central bank will cut its key rate by 75bp, adding: “Many emerging market economies have reduced their policy interest rates to support growth in recent months, including Turkey, as the CBT [central bank] swiftly responded to Covid-19 related developments with a series of measures, and maintained its cutting cycle.
“The Bank will likely continue with additional moves given the extent of coronavirus pandemic effects. The current stance complements a policy mix that aims to mitigate the downside risks to growth, and this does not rule out further rate cuts, in our view. Currency developments that could risk price and financial stability will also be closely watched, though a recent recovery in the Turkish lira after decisions by the Banking Regulation and Supervisory Agency should also be encouraging for the CBT.”
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