MacroScope

Turkey’s central bank, never known for its orthodox approach to monetary policy, managed to stun markets yet again today. Faced with a currency that has fallen over 5 percent against the dollar in the past five weeks, the bank decided to cut interest rates by half a percent, helping the lira plumb fresh 28-month lows. Analysts had expected it to raise the overnight borrowing rate by 350 basis points, which it duly did as well. In addition, it said it would start auctioning dollars if needed. A real policy mix, as one bond trader in London remarked.

On the face of it, a rate cut is the last thing Turkey needs — the economy is clearly overheating, with first quarter growth over 11 percent. Inflation is above target and there is a huge current account deficit that  needs financing. According to RBS analyst Tim Ash, “the danger with this totally out-of-the-box move is that investors will seriously begin to question the credibility of the central bank as an institution”.

But some observers, puzzling over the move, are wondering if the central bank could really be ahead of the curve this time. The bank said the rate cut was needed given potential risks to the Turkish economy from the deepening global weakness. After all, its decision comes  on the heels of an unexpected Swiss rate cut and Japan’s yen market  intervention — both moves dictated by the need to curb surging currencies. There is talk of more bond buying from the ECB and the U.S. Fed.  And another emerging central bank, Russia, on Thursday held interest rates steady, stressing the need to guard against a slowdown during an uncertain time.

What Turkey is essentially doing is betting on a global recession, say BNP Paribas analysts. They say the central bank’s strategy could pay off  ”if the global recession is deep enough and it doesn’t lead to a global selloff of risky assets.”  It remains to be seen if other emerging central banks follow its example.