Turkey Central Bank Opts For Deeper Rate Cut Again

Turkey Central Bank Opts For Deeper Rate Cut Again
September 13, 2019


The Turkish Lira gained against the greenback yesterday despite a greater-than-anticipated rate cut by the central bank of Turkey. The primary reason was that some of the major participants in the financial markets had expected the country’s central bank to bring the interest rates down to single digits, in line with a statement made by the Turkish President Recep Tayyip Erdoğan on Monday. That would have slowed down the inflation rate considerably. The rate cut of 325 basis points announced by the central bank, almost 50 basis points higher than the market’s expectation, was still a relief to financial institutions, speculators and investors. From a high of 5.7596, the USD/TRY pair declined to a low of 5.6584 in the past 24 hours.

Turkish President Recep Tayyip Erdoğan had suggested a deep cut in benchmark interest rates by the central bank of Turkey. In his televised speech, Erdoğan acknowledged that inflation would slow down further in case interest rates are brought to single digits. The country’s inflation, at the end of August, had slowed down to 15.01%, representing a 15-month low.

The monetary policymakers, who met yesterday at the Turkish capital of Ankara, decided to cut key interest rates by 325 basis points, about 50 basis points higher-than-anticipated by economists. The huge rate cut decision was taken to boost economic growth.

Specifically, the Monetary Policy Committee, headed by CBRT or TCMB (Türkiye Cumhuriyet Merkez Bankası) Governor Murat Uysal opted to slash the benchmark interest rate, which is basically one-week repo auction rate, to 16.50% from 19.75%.

Economists had anticipated a 275 basis point rate cut. Notably, in July, the central bank had cut interest rate by a huge 425 basis points, the first one under the leadership of Uysal.

On July 6th, Erdoğan sacked the previous TCMB Governor Murat Cetinkaya following his defiance to fall in line with the President’s suggestion to cut benchmark interest rates to aid economic growth.

Commenting on the rate cut, the central bank of Turkey said: “The extent of the monetary tightness will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process.”

The central bank further stated that domestic demand scenario and the level of monetary squeezing would continue to back disinflation. The central bank anticipates the economy to slowly recover, supported by disinflation and betterment in financial environment.

The Turkish lira strengthened because the rate cut was not as deep as suggested by President Erdoğan. The removal of the previous Governor of the central bank has already eroded central bank’s independence from political hindrance. Two new deputy governors were also appointed last week. So, the lira’s recovery may be short-lived as market confidence remains low.

The USD/TRY currency pair is trying to consolidate after a steep fall yesterday. The stochastic oscillator is still in the overbought region. As a result, we can expect the currency pair to move down further in the short-term.

TRY - technical analysis - 13th Sept 2019

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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