Turkey rate cuts back on agenda

Central bank’s shifting stance hints that it’s now bracing for a severe downturn

Word by word, Turkey is starting to dismantle the playbook it used to halt a run on the lira.

With a recession looming, the central bank toned down its pledge to keep borrowing costs elevated and changed its assessment of inflationary pressures. While its benchmark was kept steady at 24 per cent for a second meeting on Thursday, the tweaks increase the odds of an interest-rate cut ahead of the municipal elections in March, according to Nomura International Plc.

“The partial but unmistakable softening of the rhetoric should keep those concerns alive,” Nomura economist Inan Demir said by email. “We think the central bank should stay on hold well into the second half of 2019. However, we acknowledge the risk of earlier easing as the accumulation of negative growth indicators is likely to strengthen calls for lower rates.”

Governor Murat Cetinkaya has till recently emphasised that tight policy was needed for an extended period of time. But investor fears over a “premature” rate cut have returned as the economy’s fortunes went sharply lower and the lira stabilised. The central bank’s shifting stance supports the view it’s now bracing for a severe downturn.

The lira rallied briefly on the decision to leave rates unchanged, then erased gains after the market absorbed the changes in guidance. After rising initially as much as 0.8 per cent, the Turkish currency was trading little changed at 6.35pm.

In the past, Turkey’s central bank has had to confront political pressure at home for lower borrowing costs.

The most striking departure from the central bank’s previous language on the path for rates was an omission of the word “decisively” in its pledge to keep monetary policy tight. It also dialled down the gravity of the risks it sees to inflation.

“The fact that the central bank dropped ‘decisively’ can fuel market speculation about an early rate cut,” Rabobank strategist Piotr Matys said by email.