Turkey gearing up for rate cuts but not today

February 21, 2012

Could the Turkish central bank surprise markets again today?

Given its track record, few will dare to place firm bets on the outcome of today’s meeting but the general reckoning for now is that the bank will keep borrowing and lending rates steady and signal no immediate change to its weekly repo rate of 5.75 percent. With year-on-year inflation in the double digits, logic would dictate there is no scope for an easier monetary policy.

But there are reasons to believe the Turkish central bank, whose mindset is essentially dovish, is letting its thoughts stray towards rate cuts. Consider the following:

a) Governor Erdem Basci has already said he does not see the need for further policy tightening  b)The lira has strengthened  9 percent this year against the dollar and is back at levels last seen in early September, thanks to almost one billion dollars in foreign flows to the Turkish stock market and well-subscribed bond issues. And crucially c) Global factors are supportive (developed central banks are continuing to pump liquidity and a bailout  has finally been agreed for Greece) .

So some analysts are already weighing the likelihood of a pre-emptive rate cut in Turkey. ING analyst Sengul Dagdeviren writes:

Depending on the CBT’s view on capital inflows (ECB LTRO due soon, quantitative easing bias strengthening in G10, and Greece worries diminishing look supportive in that regard), the chance that it could surprise markets by lowering the upper band of the overnight interest rate corridor to 9 percent (down from 12.5 percent) remains.

The key to this will be the lira’s exchange rate.

If the tide of investment flows to emerging markets continues (and signs are it will) the lira may continue to rise. Goldman Sachs analyst Ahmet Akarli notes that the pass-through from the exchange rate to inflation in Turkey is rapid, with an additional 5 percent trade-weighted lira appreciation from current  levels enabling the central bank to achieve its inflation target.  The lira is currently trading around 2 against a euro/dollar basket.

If we are right, the likelihood of (central bank) easing, as well as regular FX interventions, could increase steadily below the 1.90-1.95 basket level (Akarli writes)...Headline CPI will probably fall to a lower plateau of about 8.5 percent in the second quarter of 2012. This will probably provide the (central bank) with an opportunity to reverse some of the tightening it had delivered late last year and early this year.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/