For the first time in more than four years, Turkey's central bank is expected to announce an interest rate cut at today's Monetary Policy Committee (MPC) meeting. As markets focused on the extent of today's decision, local and foreign economists predict a rate decrease from 200 points to 600 points.
The Central Bank of the Republic of Turkey's (CBRT) newly appointed governor, Murat Uysal, will chair today's MPC meeting for the first time. The markets therefore are waiting for the MPC decision text, looking for messages communicating the bank's interest rate policy in the upcoming period.
The backward trend in inflationary expectations and the sharp decline in Turkey's risk premium as well as the prospective rate cut policy of the central banks of the developed countries have strengthened predictions for a rate cut by the CBRT.
Today will be the first time since February 2015 that the central bank will have decided on decreasing its policy interest rate, which currently stands at 24%. While widespread expectations vary by 200 points to 250 points, economists stress that by the end of the year, the policy rate is likely to drop to 18%.
At the MPC meeting on Feb. 24, 2015, the central bank cut the one-week repo rate by 245 basis points, from 7.75% to 7.50%. At another meeting on Sept. 22, 2016, the bank decreased the overnight borrowing rate to 8.25% from 8.5%.
Rabobank Emerging Markets Strategist Piotr Matys stressed that since the appointment of Murat Uysal to replace former central bank Gov. Murat Çetinkaya the market trend has begun to change in favor of a sharp rate cut.
Considering the positive trend in inflation, the appointment of Uysal and President Recep Tayyip Erdoğan's remarks, Matys noted that the central bank may announce today a 200-basis point cut in policy rates; however, it is likely that the rate cut would be as high as 400 to 600 points, which could destabilize the Turkish lira and raise inflationary pressures again. The best option, he remarked, would be a rate cut in line with market expectations.
Capital Economics Emerging Markets Senior Economist Jason Tuvey emphasized that the Turkish central bank will make aggressive interest rate cuts. While today's meeting will announce a decrease in the rates, the bank will continue taking aggressive steps at the following meetings until the end of the year, he added.
Falling inflation and signs of economic improvement support the decision to decrease interest rates, Tuvey said.
Leading central banks around the world have recently adopted a dovish policy, he noted. While he was previously expecting a 100-basis point cut from the Turkish central bank, the rates could decrease by 250 points following the recent statements of Uysal, he explained. By the end of the year, the central bank could cut the rates by 800 points, Tuvey added.
Tacirler Investment Research Director Özlem Bayraktar Gökşen told Anadolu Agency (AA) that the central bank is likely to cut the rates by 250 points and 600 points by the end of the year.
"After CBRT Gov. Murat Uysal's statements highlighting the real policy rates, we think that country comparisons will become significant for the monetary policymaking," Gökşen said. Turkey offers a real interest rate well below real and expected inflation dynamics. Taking into consideration the last 12-month period, inflation has been falling since October 2018.
At least 300 basis points rate cut expected
QNB Finansinvest Chief Economist Burak Kanlı noted that he expects an interest rate cut of at least 300 basis points.
Emphasizing that he predicts that the CBRT will reduce the policy rate to 18% by the end of the year, Kanlı said that the central bank will switch in the upcoming period from the conventional monetary policy approach that prioritizes price stability to the approach that observes short and medium-term economic growth outlook at least as much as price stability.
Kanlı remarked that significant interest rate cuts in the coming months would be consistent with this, adding: "In addition, the number of annual meetings will be increased to 12 again as of next year. The minutes of the meetings could contain more detailed explanations as to why the decisions are made. Indeed, one of the issues emphasized by the new governor was to strengthen communications between the bank and the public."
Deniz Yatırım strategist Orkun Gödek pointed out that they expect that the CRBT will start the discount process with a cut of 250 basis points in July.
"With the continuation of supportive external financing conditions, the U.S. Federal Reserve's (Fed) downward revision in policy rate at the end of the month - which will not be surprising at all - and the base effect of inflation running in the next three months, an adjustment of at least 550 basis points can be made in Turkish monetary policy throughout the year," Gödek noted.
According to Gödek, the size of the downward adjustment could be widened if the base effect, which will work in the opposite direction during the November-December period, does not increase significantly and if low volatility and a relatively stable course in lira continues and if the country's risk premium falls to 300 basis points.
Pointing out that everything is positive so far, Gödek said that topics such as the lack of appetite for the dollar to weaken in global markets as expected, the expected recovery in the global economy in the second half of the year, whether the Fed and the European Central Bank (ECB) will meet their monetary expansion expectations as much as they are priced, and when domestic residents will abandon the tendency to accumulate foreign currency deposits will be determinative in the monetary policy formation process.
"Therefore, the policy maneuver, which will be provided from base point effect on inflation after a certain point, will be replaced by a different environment where other variables are evaluated together. In addition, tight monetary policy might be needed again to move inflation from 12-13% to single digits in 2020, and we have to pay attention to this due to the effect of the lira on inflation," he added.
The median of policy rate cut expectations by economists in an AA Finans survey stood at 250 basis points. While all economists expected an interest rate cut, the estimates varied between 150 and 500 basis points.