Turkey: CBRT cuts benchmark rate with 325 bps – Nordea

Morten Lund, analyst at Nordea Markets, notes that in Turkey, the CBRT cut its benchmark rate with 325 bps, once again demonstrating its lack of independence.

Key Quotes

“Despite the relatively large cut, the market reaction has been positive. We, however, keep our structural negative view on the TRY.”

“At today’s meeting, the Turkish central bank (CBRT) decided to lower its one-week repo rate for a second consecutive meeting. This time the cut amounted to 325 bp compared to 425 bp in July. The key rate now stands at 16.50%.”

“The sequence of cuttings is a direct consequence of President Erdogan’s frustration with interest rates being too high, which led to the sacking of the now former CBRT governor, Murat Cetinkaya, and the appointment of former deputy, Murat Uysa. In essence, the development in Turkey over the past months clearly cements our view that the central bank will never be truly independent under Erdogan’s reign.”

“As such, today’s rate cut of 325 bp could appear dovish on the surface, but the TRY reacted positively with gains of almost 1% against the EUR. In our view, this somewhat odd pricing behaviour can be attributed to i) unconventional measures not being introduced ii) a “relieve” reaction given the extreme range of cut projections iii) markets being positioned for more aggressive cuts than expected by economists and iv) market participants believing in a more benign inflation outlook (CBRT said year-end inflation could be below their forecast of 13.9%).”