July 25, 2019 / 5:22 PM / 3 months ago

How far and fast can Turkey cut interest rates from here?

LONDON (Reuters) - Turkey’s President Tayyip Erdogan will be humming a happy tune. The man he has just installed to head the country’s central bank has followed orders and slashed interest rates by a punchy 4.25 percentage points.

A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey, March 29, 2019. REUTERS/Murad Sezer

Furthermore, as the graphics below show, that might be just for starters. Money markets now think another 2 percentage points will be lopped off by the end of the year and even that would still leave them above where they were just over a year ago.

So barring any sudden market flare up, the next cut is expected to come at the central bank’s next meeting on Sept. 12. Coincidentally that is also the day of the European Central Bank’s next meeting where it now looks set to sink euro zone rates even deeper into negative territory.

Could that give Turkey the cover to cut aggressively again? It certainly will not hurt the cause.

“It was very aggressive,” Edwin Gutierrez head of emerging market sovereign debt at Aberdeen Standard Investments said of Thursday’s cut. “And they are getting away with it thanks to the very benign global backdrop.”


The stark turnaround in sentiment towards in Turkey in recent months has come despite plenty of worries about geopolitics.

The recent purchase of the Russian-made S-400 missile defence system has raised the threat of a U.S. backlash, Syria is simmering and it is also now in a spat with the European Union over oil and gas drilling near Cyprus.

Markets have been rebounding, but appetite for Turkish assets remains fragile for now Deutsche Bank analysts noted on Thursday.

Since the start of the year, investors have pulled some $2.5 billion out of lira-denominated Turkish debt, which, next to Poland, is the highest amount of any emerging market this year. They calculate it has also left foreigners holding near record low amounts of Turkey’s debt at roughly 11 percent.


Another factor to consider is that even after Thursday’s monster cut, so called “real” interest rates in Turkey - the interest rate versus the inflation rate - is still one of the highest out there.

On the plus side, that should keep investors keen on the country’s bonds, but Erdogan is likely to be jabbing his new central bank chief, Murat Uysal, saying it shows he has more work to do.

“The lira fell 1% immediately after the CBRT (central bank) decision but recovered shortly after, implying the bank may not have gone too far ahead of implicit market expectations,” Oxford Economics’ analyst Maya Senussi said.

“Nonetheless, pressure for fresh stimulus ahead of the next CBRT meeting in September may still prompt anxiety among domestic and foreign investors.”

Additional reporting by Karin Strohecker; Editing by Alison Williams

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