Little stands in the way of the Turkish central bank’s ninth straight interest-rate cut after measures to prop up the lira drove out foreign investors.
For the first time since December, economists unanimously predict the key rate will be reduced on Thursday, pushing borrowing costs deeper below zero when adjusted for inflation.
Most are holding out for a 50 basis-point decrease to 8.25%, according to a Bloomberg survey. A sizable minority is penciling in an even larger move.
By taking a heavy-handed approach to defending the lira, authorities are opening the way for lower borrowing costs, a linchpin of the government’s strategy to keep cheap credit flowing to consumers and businesses as it tries to mitigate the economic fallout from the coronavirus outbreak.
The currency is now hovering around its strongest level in over a month, having snapped a nine-day winning streak on Wednesday that propelled it back from a record low. It’s still down 12.4% since the beginning of the year.
Barclays Plc, which predicts rate cuts of half a percentage point in May and June, said the recent currency gains can swing the decision toward a bigger decrease this week.
“Following the recent appreciation trend in the lira, we see risks of a larger cut — that is, the Turkish central bank may alternatively consider to deliver a single 100 basis-point cut in May,” Barclays analysts including Ercan Erguzel said in a note to clients.
Although the prospect of ever-looser monetary policy threatens to weaken the lira, traders say taking positions against the Turkish currency has become a risky proposition for foreign investors, who once accounted for the bulk of activity in this market. In their absence, Turkish banks are playing an outsized role in stabilizing the lira.
On average, foreign investors made up just under a third of all lira trades executed with local lenders over the past 30 trading days through May 11, according to central bank data and Bloomberg calculations. That’s the lowest share in a decade, and down from a high of 65% in 2018. Meanwhile, trades between Turkish lenders made up 37% of the market, the most on record.
The shift follows a raft of new anti-manipulation rules and months of currency interventions by state lenders, which have been flooding the market with dollars to prop the currency up.
What’s more, a liquidity squeeze has at times made shorting the lira prohibitively expensive for foreign investors.
Earlier this month, the banking regulator briefly barred local lenders from trading with Citigroup Inc., UBS Group AG and BNP Paribas SA. While the ban was lifted within days, BNP has stopped offering new lira trades to clients at its foreign- exchange prime-brokerage unit, according to people familiar with the matter.
“The lira has been defying the odds in recent days,” said Phoenix Kalen, a strategist at Societe Generale SA in London.
“This marked resilience may be attributable to continued currency interventions via state banks, regulatory interventions that magnified the risk of speculative short lira positions,” and speculation that Turkey may be close to securing a currency swap line.
On Wednesday, the Turkish central bank announced that it was tripling the limit of an existing swap deal with Qatar to $15 billion.
Turkey ran down its hard currency buffers to prop up the lira this year and finding a source of foreign exchange has become increasingly urgent, with gross central bank reserves down $17 billion since the beginning of the year to $89.2 billion.