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Analyst:  Central Bank willing to make sacrifices on the Turkish lira, financial stability

The rate cut showed that the bank’s “overriding objective is to support economic growth and it is willing to make sacrifices on the Turkish lira, as well as on financial stability and price stability considerations,” said Phoenix Kalen, director of emerging market strategy at Societe Generale

Analyst:  Central Bank willing to make sacrifices on the Turkish lira, financial stability

Central Bank’s 100 basis point rate cut is making head waves among domestic and international investors.  Most commentators think CBRT committed a mistake by cutting rates before head-line inflation began its presumed descent.   Additionally, TL  REAL deposit rates are now going to move deeply into negative territory, discouraging saver from holding the local currency.

 

Marking its eighth straight rate cut, Turkey’s central bank lowered its benchmark one-week repo rate from 9.75%, extending an aggressive easing cycle that has seen it fall 1,525 basis points in less than a year, beyond most analyst forecasts.

 

The median expectation was for a cut of 50 basis points in a Reuters poll of 18 economists, with predictions ranging between no change and a 100 basis point cut.

 

Speaking to CNBC.com, “The rate cut showed that the bank’s “overriding objective is to support economic growth and it is willing to make sacrifices on the Turkish lira, as well as on financial stability and price stability considerations,” said Phoenix Kalen, director of emerging market strategy at Societe Generale.

The lira hit its weakest level since August 2018, in New York session, despite more FX sales by state banks.   Constantine Courcoulas and Kerim Karakaya

of Bloomberg wrote at the terminal: “Turkish government-owned lenders sold at least $300 million to support the currency after a bigger-than-expected rate cut piled pressure on the lira, according to two traders with knowledge of the matter. Interventions come as the lira tests the psychologically important 7-per-dollar mark, a level it hasn’t crossed since the August 2018 currency crisis.

USD/TRY rose as much as 0.3% to 6.9991 per dollar; its all-time high is at 7.2362.

 

Speaking to Laura Pitel at Financial Times, Nafez Zouk, of the consultancy Oxford Economics, said that Turkey was in danger of a “classic balance of payments crisis”.

 

“The fall in export revenues from goods exports to Europe and from the fall in tourism are not going to offset the windfalls you get from oil prices,” he said.

 

Gross reserves, including gold, have fallen from $105bn at the start of the year to $89bn in the second week of April. That is equivalent to slightly more than half of Turkey’s short-term external debt, with $168.5bn of payments falling due in the next 12 months.

 

An independent economist working for a Turkish think-tank, who wished to remain anonymous e-mailed to PA Intellignece the following commnets:

“The Bank justifies the move on the grounds of a very weak growth and inflation outlook. It seems to have kept the very dovish inflation paragraph  virtually unchanged from the previous statement (i.e. still sees downside risks to its forecast of 8.2%, which, of course, is debatable) but now growth concerns take centerstage, with the Bank making a fairly outlandish claim, to put it frankly, that “recent monetary and fiscal measures will contribute to financial stability and post-pandemic recovery by supporting the potential output of the economy”.

We know that protracted periods of demand weakness might have some supply-side consequences eventually, but we fail to follow the logic or the connection here as to how exactly “potential” output is supported with expansionary monetary and fiscal policies.

More importantly, the Bank does not acknowledge the risks or seem at all concerned about adverse consequences of real interest rates being deeply in negative territory. After all, the CBRT has been losing reserves at a very rapid pace, base money has been growing very fast, the lira has been depreciating quite rapidly despite the intervention, exposing firms with currency mismatches to another balance sheet shock; there is very little confidence in TL with the country risk premium hovering around all-time highs (at over 600 bps)”.

 

 

Has Turkey sealed its own fate with an ill-timed rate cut?  In the absence of swap lines or a very quick end to Covid-19, more investors will ask this questions each passing day.

 

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