Aftermath:  Central Bank of Turkey rate cut

Turkish view by Yatirim Finansman Securities: Beware of negative consequences

The CBRT stressed that the drivers of the recent increase in inflation (rise in food and import prices, supply constraints, increase in administered prices and demand developments due to the reopening) are transitory. The CBRT re-emphasized that the decelerating impact of the monetary tightening on credit and domestic demand is being observed.

The CBRT also stated just before the rationale of the decision (their views on the loan growth was given in the previous paragraphs in the context of the economic activity) that “tightness in monetary stance has started to have a higher than envisaged contractionary effect on commercial loans. In addition, macroprudential policy framework has been strengthened to curb personal loan growth”. The CBRT stated that the Committee judged that a revision in monetary policy stance is needed after their evaluations on the analyses which decomposes transitory factors (demand factors that monetary policy can have an effect, core inflation developments and supply shocks).

This was shown as the rationale of the cut in the policy rate. We should note that there were no touches on short term inflation outlook, CBRT’s inflation forecast path, high level of inflation expectations and risks on the pricing behavior.


According to us, the potential impacts of the recent action would be negative

There were some other remarkable points in the press release. The following phrase which had used since the last Governor replacement: “The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5% target is reached.” revised as: “The CBRT will continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5% target is achieved in pursuit of the primary objective of price stability”. This was an expected revision. To recall, Governor Kavcioglu stated that the importance of core CPI figures and expected inflation has increassed during a speech two weeks ago, just after the actual headline CPI (19.25%) exceeded the policy rate. There are stil important upside risks on the inflation outlook.

According to our basis scenario, headline and core inflation figures continue to be at the current levels in September and October, before they start to decrease thanks to the basis effect in November and December. We expect that the impact of this decision on both short term pricings in the market and on inflation outlook, dollarization, volatility of the Lira assets and portfolio flows would be “Negative”. We should also state that the emphasis on the contraction of commercial loan growth just before the rationale of the cut would harm the credibility of the CBRT whose main objective is to achieve and maintain price stability.


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FT:  Is this crazy, or what?

“This is a crazy move, a ridiculous move,” said Tim Ash, an emerging markets strategist at BlueBay Asset Management. “Inflation is high and rising so there’s no justification for this except politics. Erdogan’s gambling with the lira because he’s losing popularity and is desperate to get the economy moving. This isn’t a proper central bank, it’s Erdogan’s fiefdom.”



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Reuters:  This isn’t going to help…


“This will not help the central bank’s already fragile credibility, and the market reaction is likely to be quite severe,” said Roger Kelly, lead regional economist at the European Bank for Reconstruction and Development in Istanbul.


“Most expected rates to remain unchanged for at least another month.”


Nikkei Asia:  Define excessively dovish…


“Once again, investors were caught out by an excessively dovish central bank,” Erik Meyersson, senior economist at Handelsbanken Capital Markets, told Nikkei Asia.




“In this case, there were clear indicators that a cut was to be expected given President Erdogan’s speeches as well as how the central bank had previously updated its guidance shifting focus from headline to core inflation, arguably for the purpose of generating the official space for a cut,” Meyersson said.



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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.