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Lira’s Damage Is Contained as Rate Cuts Are Already Priced In

Lira's Damage Is Contained as Rate Cuts Are Already Priced in

(Bloomberg) -- Traders aren’t pricing in another full-blown policy blunder despite President Recep Tayyip Erdogan’s latest encroachment on central-bank independence.

Cross-currency swaps -- which gauge the market’s appetite for lira risk -- held within its recent trading range below the 20% mark, trimming an increase of about 100 basis points during early trading.

Lira’s Damage Is Contained as Rate Cuts Are Already Priced In

That’s probably because the market had already given the policy maker the all-clear to ease financial conditions. The one-year swap rallied from a high of more than 30% in May to a low of 18.81% last week, about 520 basis points below the central bank’s policy rate of 24%.

And with inflation seen slowing dramatically through September, Turkey’s real rate will stay attractive, even if borrowing costs are reduced.

The irony is that the road to lower interest rates would’ve been smoother had Erdogan not dismissed central bank Governor Murat Cetinkaya. Now that he has, the worry is that borrowing costs will be lowered faster than warranted.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, ;Onur Ant at oant@bloomberg.net, Srinivasan Sivabalan

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