MNI INTERVIEW: CBRT To Ease Further After Lira Selloff
MNI (LONDON) - The Central Bank of the Republic of Turkey is likely to continue to cut rates this year, though it may slightly pare back its easing plans, after being forced to intervene to support the lira this week following the arrest of a leading opposition figure, a former CBRT deputy governor told MNI.
Policymakers cut rates by 250 basis points at each of the last three meetings to leave the key two-week reference rate to 42.5% in March, but the pace of easing is likely to slow, Ibrahim Turhan said.
But with a crisis averted and inflation still falling, the CBRT will still see room for manoeuvre as it bids to bring inflation in line with 2025's target of 24%, he added. While Turhan did not specify how much further easing he now expects this year, he told MNI last month that the Bank had room for between 450 and 600 basis points of further interest rate cuts until the end of June.
The arrest of Istanbul Mayor Ekrem Imamoglu prompted a slide of more than 12.7% in the lira against the dollar on Wednesday before the CBRT intervened, selling foreign currency worth USD9 billion via public banks. The lira recovered to end the day only 3% down, a level which MNI understands has reassured the CBRT that it can get back to its rate path plans. (See MNI EM POLICY: CBRT Hopes To Hold Course After Lira Storm)
“The CBRT will definitely make a detailed assessment, and the Monetary Policy Council will take into consideration the situation from all angles and perspectives while deciding on its next move,” said Turhan.
EFFECTIVE RESPONSE
“They have enough time for this and I don’t see any reason why they should not adjust their position if they see it necessary. Having said that, this doesn’t mean that they must consider changing the interest path dramatically. Inflation will continue to come down and I still think that there’s room for further rate cuts.” (See MNI INTERVIEW: Top End of CBRT Target Range In View - Ex-DG)
Turhan - a former MP with president Recep Tayyip Erdogan’s Justice and Development Party - praised the CBRT for its response to the market volatility.
Finance Minister Mehmet Simsek has also announced that the ongoing economic programme would continue without any changes, Turhan noted, adding that the Treasury’s financing programme was not at risk.
On Thursday the Borsa Istanbul was up around 0.8% by about 1300 GMT and the lira was 0.9% weaker against the USD.
Banks and non-financial firms can easily rollover debt at reasonable rates, while any risks that might arise from a potential capital outflow by foreign investors are limited and could be covered by the central bank, Turhan said.
Geopolitical developments and economic fundamentals remain supportive of Turkey’s positive overall economic outlook, though further stock market losses can be expected in the short term.
“A portfolio shift to foreign currency by residents will not change in net terms the international reserve position of Turkiye, and hence will not cause a permanent and significant FX risk. However the adverse impact on the stock market can be relatively higher and can cause higher volatility for a while, though I don’t expect it to be permanent either,” Turhan said.