Only Economist to Call Turkey Cut Sees Lower Rates, Weaker Lira

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The only economist to call the surprise interest rate cut by Turkey’s central bank says he sees further rate reductions, a weakening lira, and rising inflation.

Ibrahim Aksoy, the Istanbul-based chief economist at HSBC Asset Management Turkey is not just the sole analyst out of 23 to predict last week’s move; he also ranks first among forecasters of Turkish rate decisions in two years of Bloomberg surveys. 

Aksoy penciled in a cut of 50 basis points ahead of Thursday’s monetary policy meeting because of the governor’s decision to switch from monitoring inflation to the much lower core inflation measure. He also predicted the Turkish currency would test new lows following the move.

The central bank ultimately cut twice as deeply as even Aksoy’s prediction but he was right about the lira, which slid to a record low, reclaiming its title as this year’s worst-performing emerging market currency.

Turkey Delivers Surprise Rate Cut, Lira Sinks to Record Low

Turkey’s surprise rate cut comes after President Recep Tayyip Erdogan promised cheaper borrowing costs and slower inflation starting this month. Not delivering on that could have cost the governor his job; Erdogan fired his three immediate predecessors.

Aksoy told Bloomberg News that by dropping its pledge to keep interest rates above price growth and switching its emphasis to core inflation, which strips out volatile items like food, the central bank had given itself room to ease even further. But he refused to predict how deep those cuts could go. 

“The possibility of taking a subjective cut decision has increased,” he said. “Therefore it is impossible to give a total cut figure for the rest of the year.”

Aksoy said the central bank’s decision to start its monetary easing cycle early may prompt overseas investors to exit the swap and bond markets, meaning “that the depreciation pressure on the lira and, as a side effect, the upward inflation pressure, will likely continue.”

That increases the risk that inflation will surpass Aksoy’s current year-end inflation forecast of 17%, he said. Aksoy predicts that demand will remain relatively strong ahead of elections planned for 2023, keeping inflation elevated next year too. His inflation forecast for the end of 2022 is 14%, significantly higher than the government’s own target of 9.8%.

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