Turkey's Mission to Lower Rates Could Take Longer After Shake-Up
Erdogan may end up losing the long game of bringing Turkish interest rates lower after installing a new central bank governor.
(Bloomberg) -- President Recep Tayyip Erdogan may end up losing the long game of bringing Turkish interest rates lower after installing a new central bank governor.
The ouster of Murat Cetinkaya just over two weeks ago all but clinches deeper monetary easing in the quarters ahead, according to analysts surveyed in July. But while new Governor Murat Uysal could push the benchmark to 19% by the end of this year, 3 percentage points below the median forecast a month earlier, he might start to lag from 2021, the poll by Bloomberg showed.
“Rate cuts will begin in July and probably proceed until rates fall until say, 17% or slightly lower, before the exchange rate and financial consequences wreak havoc,” Commerzbank AG analyst Tatha Ghose said in a report.
Easing is set to begin at a meeting on Thursday with a cut to 22% from 24%, according to the median of 29 estimates in a separate survey. The key rate will eventually fall to 14.5% in the first quarter of 2021, above the previous prediction of 14%, forecasts compiled by Bloomberg showed.
Erdogan has made clear he expects the central bank to heed his calls for rate cuts after the shake-up following a policy pause that lasted for more than nine months. Convinced that higher interest rates cause inflation, the president lashed out at Cetinkaya for failing to “follow instructions” and suggested that monetary policy makers will now provide stronger support for the government’s economic program.
Stimulus will come in handy for an economy struggling to gain momentum after exiting a technical recession in the first quarter. Analysts now expect a deeper contraction through the third quarter than previously forecast, before gross domestic product returns to annual growth in the final three months of 2019.
An improving inflation outlook should put to rest any last doubts about the looming rate cuts. Economists revised down forecasts for price growth from the fourth quarter, although the disinflation could stall toward the end of next year. Erdogan promised that inflation will be in single digits already by end-2019.
| What Our Economists Say... |
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“Slower inflation and greater stability in the lira have created the environment for a rate cut this month. But the firing of Cetinkaya has led to predictions of more aggressive easing.” --Ziad Daoud, Mideast economist Click here to view the piece. |
Morgan Stanley, which more than doubled its estimate for a cut at Turkey’s July 25 rate meeting to 250 basis points, said a “better-than-expected” price trajectory in recent months and lira stabilization are among the biggest factors behind its more aggressive call.
However, it’s the change atop the central bank that largely dictated Morgan Stanley’s revision.
“The biggest driver of the change is the relatively more dovish or cautiously optimistic rhetoric of Governor Uysal,” Morgan Stanley economist Ercan Erguzel said in a report.
--With assistance from Harumi Ichikura.
To contact the reporters on this story: Abeer Abu Omar in Dubai at aabuomar@bloomberg.net;Sarina Yoo in Seoul at kyoo3@bloomberg.net
To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Michael Gunn
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