October 24, 2019 / 2:31 PM / 19 days ago

Turkey slashes rates as threat of Syria sanctions fades

ISTANBUL (Reuters) - Turkey’s central bank slashed its policy rate more than expected to 14% on Thursday, taking advantage of an inflation dip and a steadier lira after Washington canceled just-announced sanctions over Ankara’s military incursion into northeast Syria.

The bank lowered its benchmark one-week repo rate TRINT=ECI by 250 basis points, from 16.5%. It has cut interest rates tmsnrt.rs/32KbNrP aggressively from 24% since July to help revive Turkey's recession-hit economy after last year's currency crisis.

Some economists were surprised by the sharp easing move after two weeks of lira volatility related to Turkey’s attack on Kurdish-led forces in northeastern Syria, which drew international condemnation and threats of repercussions.

A Reuters poll had predicted a cut of 100 points.

But the central bank said inflation would likely decline more than it had expected by year end after a “significant fall” in September, and it repeated guidance that the policy stance was “to a large part” consistent with that path.

Expectations for monetary easing were initially curtailed after troops crossed the Syrian border on Oct. 9, hitting the currency and prompting U.S. sanctions over Turkey’s attacks on Kurdish forces that were once U.S. allies.

But the lira, which plunged 30% last year, recouped some losses after Washington opted last week for a light set of sanctions, re-opening the door to the rate cut. It rallied again on Wednesday when U.S. President Donald Trump canceled them and said a ceasefire had been reached.

“They were definitely encouraged by the lifting of sanctions,” Piotr Matys, emerging markets forex strategist at Rabobank, said of Turkish central bankers.

“It was a positive move and it increased the room for maneuver, but not enough to justify a cut of 250 basis points.”

CRISIS IN REAR VIEW MIRROR

The Turkish lira slipped 0.7% against the dollar, to 5.7725, after the bank’s third rate cut in as many policy meetings, totaling 1,000 basis-points of easing.

(Graphic: Turkey's central bank cuts key rate, again, here)

The policy rate is now nearly as low as early last year, before the crisis hit and tipped the Middle East’s largest economy into recession, sent inflation soaring above 25%, and prompted aggressive monetary tightening.

Inflation has since eased, reaching 9.26% in September. In its latest forecast, the central bank expected it to accelerate to 13.9% by year-end once the so-called base effects have worn off.

But on Thursday the bank said “recent forecast revisions suggest that inflation is likely to materialize notably below the projections” by year end.

While the central bank has said it is targeting a reasonable real interest rate, an FX desk manager at a Turkish bank said it would sharply narrow as annual inflation rebounds in November and December.

At that time, “it might cause a significant risk on the Turkish lira,” the manager said. “But the market does not choose to price this risk today.”

SYRIA EFFECT

The monetary boost comes as Turkey takes other steps to strengthen its economy including preparing a 2020 budget that an official said was “flexible” and could be expanded for the military.

Reuters reported that the Treasury is also crafting legislation to transfer into the budget $17 billion from a central bank fund.

To limit the lira’s fall this month, Turkish state banks have sold billions of dollars and trimmed funding in an offshore swap market, according to traders.

Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum in Istanbul, said the rate cut was also meant in part to strengthen the economy given the military effort, adding: “But I am not sure it will work.”

“Deposit rates and loan rates already declined as low as they can go given the inflation rate,” she said. “I think they would defend the economy better if they didn’t touch the policy rate.”

On Wednesday, Trump rolled back sanctions applied a week earlier on some top Turkish officials and ministries.

Yet many U.S. lawmakers want a tougher response including one bill that would impose “crippling” sanctions on Ankara. Separately, U.S. prosecutors last week charged Turkey’s Halkbank in a move the state bank said was tied to Syria-related sanctions.

The military incursion could also draw European Union sanctions.

Additional reporting by Daren Butler, Ali Kucukgocmen, Nevzat Devranoglu and Behiye Selin Taner; Editing by Gareth Jones

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