Central Bank of Turkey likely to further lower rates this year

The Central Bank of Turkey cut its overnight lending rate – the upper end of its rate corridor – yesterday by 25 basis points to 8.5 percent. It kept the other policy parameters unchanged. This was consistent with expectation. The Monetary Policy Committee statement removed reference to market conditions as a policy driver. This phrase was introduced after the attempted coup in July following which the central bank had also lowered rates.

The Turkish central bank is likely to continue cutting the overnight lending rate in 25bps steps at least twice more, before the unified policy rate is set up some time in the fourth quarter, said Commerzbank in a research report. The CBT is also likely to further cut RRR.

The upper end of the corridor would get near the benchmark rate by the fourth quarter; however, this might not be an issue as the central bank intends to dispense off the corridor mechanism in favour of a single unified interest rate, noted Commerzbank. For now this sounds good as there is no pressure on the Turkish lira from the global market developments that permits the central bank to continue cutting rates.

However, such moves rises medium-term risk for the lira because if there rises a need for higher rates temporarily, the CBT might not have its main tool any longer. Therefore, the central bank would be left with the option of hiking interest rate itself. This would be difficult for the CBT to do due to political opposition.

“If rates cannot be raised, the lira would have to depreciate. We see USD-TRY at 3.25 by year-end”, added Commerzbank.