Turkey’s central bank faces a critical decision on Thursday on how much to reduce its benchmark interest rate.
The ruling by the Monetary Policy Committee in Ankara could have a significant impact on the value of the lira and possibly leave Turkey’s economy further exposed to global market volatility.
Turkey’s central bank has slashed interest rates in half to 12 percent since July, when President Recep Tayyip Erdoğan sacked and replaced its governor for failing to back the government’s pro-economic growth policies. Economists are divided on how much the central bank will cut rates this time round, with predictions varying between no cut and a 100-basis point reduction.
The market has likely priced in a cut of 50 basis points to 11.5 percent, but the central bank has surprised investors with bigger reductions in the past, Eno Eteng, a technical analyst, wrote in a column for Investingcube.com on Wednesday.
A rate cut of more than 50 basis points could provoke another sell-off in the lira, Eteng said, saying the currency may eventually fall to lows seen in August and September 2018 of 6.5728 per dollar. The lira gained 0.1 percent to 5.87 per dollar at 11:34 a.m. in Istanbul on Thursday.
Another big interest rate reduction could leave Turkey’s economy in the firing line should global market sentiment deteriorate, investors say. Economic stimulus and an overheating economy helped provoke a currency crisis in 2018 that sent the lira reeling to record lows.
Inflation in the country stood at 11.8 percent in December and most economists expect it to remain around those levels in the first quarter. Any rate cut would leave real interest rates – the difference between the benchmark rate and inflation – in negative territory, much like countries such as Britain and Japan. That would render returns from investing in lira bonds less attractive and could encourage further dolarisation in the economy.
JPMorgan Chase & Co. is confident that the central bank will cut rates at Thursday’s meeting, predicting a 50-basis point reduction, according to its emerging market economist Yarkin Cebeci.
“The widely known dovishness of the policy makers is a major factor making us confident on this view,” Cebeci said, according to Bloomberg.