The Turkish central bank cut its overnight lending rate on 24 March from 10.75% to 10.5%, which is the upper limit of the central bank’s rate corridor. This is not usually used and therefore the rate cut might not have a direct policy impact. The CBT’s surprise move might incite speculation regarding the central bank’s loss of independence. Turkey’s core inflation hovers around double-digit mark. According to the central bank’s guidance, monetary policy needs to be kept tight. In recent times, inflation has not improved much.
The Turkish central bank also gave guidance that it might need to hike rates to certain extent as the US Fed tightened. This view was held until recently when FOMC turned dovish. Meanwhile, certain AKP seniors had recently forecast that the central bank might lower rates in March. Thus the unexpected move that was not hinted by the MPC is likely to increase speculation that the CBT is losing independence.
According to Commerzbank, Turkey’s headline inflation is likely to ease in coming months as low energy prices finally impacts the economy. However, with the country’s poor inflation target record in past many years, the market is not expected to agree that the central bank should take such developments for granted.
“We think that the ‘de-coupling’ between CBT’s words and its latest action will pressure the lira as the market will struggle to make assumptions about where interest rates will be heading – we see USD-TRY rising to 3.00 levels in coming months”, says Commerzbank.
