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Turkish lira firms after sharp interest rate cut

ISTANBUL: Turkey's lira firmed slightly in choppy trading on Thursday after the central bank cut its policy rate more th

July 25, 2019

ISTANBUL: Turkey's lira firmed slightly in choppy trading on Thursday after the central bank cut its policy rate more than expected in its first policy decision after President Tayyip Erdogan sacked the bank's previous chief.

The central bank lowered its policy rate to 19.75pc, cutting by 4.25 percentage points, in its first shift since a currency crisis last year. A Reuters poll had shown that analysts expected a 2.5 percentage-point cut.

The lira briefly weakened as far as 5.78 against the dollar following the decision, but later firmed to 5.6540. It stood at 5.7 at 1341 GMT, some 0.2pc firmer than Wednesday's close of 5.7110.

Even though it was larger than expected, the cut was not outside the range of investors' expectations, said Inan Demir, senior emerging markets economist at Nomura, adding that the statement did not provide clarity on the size future moves.

"While waiting for more clarity on the near-term path of the policy rate, it is worth remembering the experience since 2011 shows easing cycles that were initially viewed positively by the markets eventually pushed real rates to levels too low to support the currency," he said.

"The risk of this scenario playing out once more requires a cautious stance," he said.

The central bank had hiked its policy rate to 24pc in the wake of a currency crisis last year that saw the lira lose nearly 30pc, pushing inflation to its highest level in at least 16 years.

The emerging market currency is down another 7pc this year but inflation dropped to below 16pc in June, opening the door to begin easing Turkey's monetary policy.

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 unexpectedly fired 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.

Separately, Turkey's capacity utilisation declined in July to 76.2pc though it remained above a nearly four-year low of 74pc in February.

Manufacturing confidence also fell towards a pessimistic area in July compared to a month earlier.

The main BIST 100 index was down 1.45pc at 1344 GMT and the main banking index traded 1.48pc lower.

Copyright Reuters, 2019