Standard Chartered said on Friday it now expects Turkey’s central bank to cut interest rates by another 300 basis points by year-end to 15% and upped its 2021 inflation and growth forecasts. Turkish Lira closed the week at 8.85 vs the American Dollar, but further rate cuts could weaken it more visibly. September CPI is expected to rise to 19.75 from August 19.25%, which figure could attract savers towards FX deposits.
“We expect the central bank to look past high headline inflation prints driven by transitory factors such as food and energy prices, and remain focused on supporting economic growth in the period ahead,” said Standard Chartered in a note. The bank had previously forecast 200 bps of rate cuts by year-end.
Standard Chartered also raised its forecast for inflation to 17.5% by year-end from 15.2% and also upped its growth predictions to 8.0% from 5.0% over the same period.
HSBC – Turkey economist Ibrahim Aksoy told Bloomberg News that by dropping its pledge to keep interest rates above price growth and switching its emphasis to core inflation, which strips out volatile items like food, the central bank had given itself room to ease even further. But he refused to predict how deep those cuts could go.
“The possibility of taking a subjective cut decision has increased,” he said. “Therefore it is impossible to give a total cut figure for the rest of the year.”
Aksoy said the central bank’s decision to start its monetary easing cycle early may prompt overseas investors to exit the swap and bond markets, meaning “that the depreciation pressure on the lira and, as a side effect, the upward inflation pressure, will likely continue.”
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“The Central Bank of Turkey’s (CBRT) 100bp rate cut and change in policy guidance will increase the challenge of bringing inflation under control and highlights the weak credibility of monetary policy”, Fitch Ratings says. “The decision also risks undermining the recent partial recovery of Turkey’s international reserve position”.
“Downward pressure on the lira has been reinforced as well by the timing of the rate cut as it quickly followed the Fed’s more hawkish policy update. The Fed signaled that it plans to taper QE more quickly than expected by likely making a taper announcement in November and then bringing an end to the tapering process by around the middle of next year.”
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“The ongoing rise in energy prices driven by supply constraints is a negative development for Turkey’s external balance. In these circumstances, we expect the overvalued lira to weaken further”, commented MUFG.
A weaker Lira is certain to spill over to headline inflation, as well as undermining economic confidence in a country where people judge the state of the economy by the strength of currency.
TL could also be hurt, if the tension in Turko-American relations escalate. President Erdogan recently announced his intention to purchase a second batch of S-400 missiles, which drew condemnation and warnings of more CAATSA sanctions from US.
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