New Turkey Central Banker Pivots With Biggest Rate Cut on Record

(Bloomberg) -- Turkey’s new central banker delivered the biggest interest-rate cut in at least 17 years, putting President Recep Tayyip Erdogan’s unconventional policy goals into practice less than three weeks after getting the job.

The monetary policy makers led by Murat Uysal slashed the benchmark borrowing rate by 425 basis points to 19.75% on Thursday, exceeding all but one of the 34 analyst forecasts. It was the first cut since 2016 and the biggest since a shift to inflation targeting in 2002.

“They’re rolling the dice,” said Paul McNamara, a London-based money manager at GAM UK, who helps oversee $9.4 billion in assets. “A very, very risky strategy. The worst-case scenario.”

The central bank cited “weaker global economic activity and heightened downside risks to inflation” and pledged to use all instruments to safeguard price stability. The lira plunged just over 1% against the dollar after the decision before erasing losses. It traded 0.7% stronger as of 3:39 p.m. in Istanbul.

“The extent of 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 said in a statement.

The sharp pivot toward monetary easing runs the risk of spooking inflation-wary investors in pursuit of Erdogan’s unorthodox theory that high interest rates cause rather than curb price growth. He fired Murat Cetinkaya as governor for failing to act, leaving Uysal with the challenge of how to navigate the conflicting demands of the presidency and markets.

‘New Era’

“The much bigger than anticipated cut marks the new era for a central bank whose independence has been severely undermined,” said Piotr Matys, a London-based strategist at Rabobank.

“While the lira has quickly recovered from the initial knee-jerk reaction, today’s decision is a very clear signal that the interest-rate differentials will narrow markedly in the coming months, leaving the currency far more exposed when the external backdrop deteriorates,” Matys said.

Uysal had plenty of reasons to start an easing cycle this month. The economy continues a slow slog after recession and lending is on the decline again. A dovish turn in monetary policy globally and a downswing in price growth have left Turkey with the world’s highest real rate before the decision.

Powerful base effects will likely continue to choke off inflation, which is already down almost 5 percentage points so far this year. The central bank on Thursday said recent forecast revisions indicate that inflation will probably end the year below the 14.6% projected in its April report.

In an interview last week, Uysal saw “room for maneuver in monetary policy” but vowed to preserve “a reasonable rate of real return” for investors.

If inflation falls to about 10% by September or October, “cuts will likely continue unless there is a negative development in the global outlook,” said Erkin Isik, senior economist at QNB Finansbank. Price growth cooled more than forecast in June to the slowest in a year, reaching an annual 15.7%.

“It seems like the central bank decided to deliver a front-loaded rate cut,” Isik said.

Currency Rollercoaster

The lira’s fortunes have also reversed, especially after President Donald Trump indicated the U.S. may reassess a threat to sanction Turkey over its purchase of a Russian defense system. The currency is the world’s best performer since the start of May.

As a drumbeat of political pressure grows on central banks from the U.S. to India, Erdogan one-upped his counterparts thanks to the powers granted to his office after last year’s general election, which transformed the political system into an executive presidency.

Still, a wallop of monetary easing could easily unsettle the calm.

Erdogan promised to take more direct control over rate decisions in an interview last year and warned following a massive rate increase in September that “there is a limit” to his patience. The tipping point came when Cetinkaya extended a policy pause to nine months in June, prompting Erdogan to call the 24% benchmark “unacceptable.”

Erdogan’s power grab was years in the making. In his view, producers have to pass on their higher borrowing costs to customers, so they raise prices.

“Guess no one is surprised with Turkey’s central bank these days,” said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management. “They did as Erdogan wanted.”

--With assistance from Harumi Ichikura and Netty Ismail.

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky

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