Turkish lira flat ahead of an expected sharp rate cut

Madiha Shakeel July 25, 2019

ISTANBUL: Turkey’s lira was little changed on Thursday as investors waited to see the size of what is expected to be a sharp interest rate cut from the central bank, which is under pressure from Ankara to ease policy to help lift the economy from recession.

At 0630 GMT, the lira stood at 5.7160 against the dollar, little changed from Wednesday’s close of 5.7110.

The bank’s benchmark rate has been set at 24% since September, in the depths of Turkey’s currency crisis that last year knocked nearly 30% off the value of the lira.

The median forecast compiled from 23 institutions showed economists expected a 250-basis-point rate cut in the policy rate on Thursday, with forecasts ranging between cuts of 100 points and 500 points in the one-week repo rate.

The central bank will announce its rate decision at 2 pm (1100 GMT).

The consumer price index https://tmsnrt.rs/32KbNrP fell to 15.72% year-on-year in June, off a 15-year-high above 25% in October fuelled by a currency crisis which resulted in the lira shedding some 30% of its value and tipping the economy into recession.

Concerns over the central bank’s independence from political pressure helped set off last year’s crisis, and its credibility has come under new scrutiny by investors after its governor was abruptly sacked less than three weeks ago.

The bank’s new governor, former deputy Murat Uysal, took the reins after Turkish President Tayyip Erdogan fired Murat Cetinkaya because as Erdogan said he failed to follow the government instructions on monetary policy.

In the rate-setting meeting, Uysal faces the challenge of protecting the lira while satisfying Erdogan, said Piotr Matys, an EM FX Strategist at Rabobank. He expects a “relatively modest” 200-point cut.

A significant rate cut “would reignite FX volatility at a time when Turkey still requires a stable lira to support the disinflation process, restore confidence amongst households and corporates and slow down the dollarization of the Turkish economy,” Matys said in a note.

Copyright Reuters, 2019

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