Turkey: An Erdoganish cut – Nordea Markets

Morten Lund, analyst at Nordea Markets, points out that the CBRT has cut its benchmark rate with 425 bp, cementing Nordea’s view that the central bank has never been truly independent under Erdogan’s reign.

Key Quotes

“This afternoon, the Turkish central bank (CBRT) decided to lower its one-week repo rate from 24% to 19.75%. A cut was widely expected, as President Erdogan’s frustration with the CBRT not lowering its benchmark rate at the June meeting resulted in the President using his “new” executive powers in order to sack the CBRT governor, Murat Cetinkaya.”

“Although his replacement - the now former deputy, Murat Uysal, - has emphasised continued independence, we believe the sacking merely cemented our long-held view that the central bank has never been truly independent under Erdogan’s reign.”

“The questions for today were therefore instead how large the cut would be and whether the CBRT would introduce any non-conventional measures. The uncertainty surrounding those questions was clearly demonstrated in the analyst survey conducted by Bloomberg in which 34 analysts had a “rate cut range” from 50 bp to 800 bp, with the median being a cut of 250 bp.”

“As such, today’s rate cut of 425 bp was dovish on the surface, as was also indicated by the TRY trading slightly lower initially after the announcement. However, the lira weakness was short-lived with EUR/TRY now close to levels before the announcement.”

“In our view, this somewhat odd pricing behaviour was partly due to unconventional measures not being introduced, and partly because of a “relieve” reaction (given the extreme range of cut projections).”