Fitch: The rate cut in Turkey is premature

Fitch: The rate cut in Turkey is premature
Fitch: The rate cut in Turkey is premature

Expectations to continue easing monetary policy after Erdogan isolates his opponents

Fitch, the international credit rating agency, strongly criticized the decision to cut the interest rate in Turkey last month, and considered that Turkey’s decision to cut the interest rate by 100 basis points was premature.
The agency’s economist, Eric Arespi, explained that the interest rate cut was an early step, and that the move that came with the change in the direction of the central bank’s monetary policy would keep uncertainty high.
On September 23, the bank unexpectedly lowered the interest rate to 18 percent; What analysts saw as new evidence of political interference by President Recep Tayyip Erdogan, who has described himself as an enemy of interest rates, arguing that they are the cause of all evil.
Arespi stressed, in statements published yesterday (Friday), that this step will make it more difficult to control inflation, which is close to 20 percent, and in light of the risks of macroeconomic instability and external weaknesses, there is a great risk that political considerations impose more monetary easing.
The decision to cut the interest rate caused a further deterioration of the Turkish lira, which is suffering at its lowest level in history, and recorded a further decline in trading yesterday, and was traded at the level of 9.23 lira to the dollar, after it started a new decline journey since last Tuesday, against the background of clarifications It was presented by Central Bank President Shihab Caucioglu before the Parliament’s Plan and Budget Committee, in which he ruled out that the interest rate cut would have an impact on the price of the lira.
The lira continued to roll after Erdogan made a new intervention by making decisions of dismissal and new appointments of a number of the bank’s vice presidents and members of the Monetary Policy Committee, which increased uncertainty and further weakened investors’ confidence in the independence of the bank’s decisions.
Despite the explicit warning of “Fitch”, experts and analysts expect another rate cut at the meeting of the Monetary Policy Committee with its new formation next week, as Erdogan dismissed opponents of monetary policy easing within the committee and appointed 3 who accept his demands related to interest rate cuts.
Experts believed that any new interest rate cut would push the lira further down, and that it might fall to the level of 9.5 pounds to the dollar within one month.
A new rate cut at the committee’s meeting scheduled for October 21 would push Turkey’s real yield further into negative territory, at a time when other central banks in developing economies are tightening monetary policy to curb inflation.
The Turkish lira topped the list as the biggest losing currency in emerging markets this year, after the central bank unexpectedly cut its key interest rate in September.
According to Christian Maggio, head of conservative strategy at TD Securities in London: “Turkey moves from one crisis to the next, and is mostly political in nature, so I leave you to imagine why the next crisis will not be the last and what is needed to stop this horrible vicious cycle that is recurring. every few quarters.” Maggio expected the lira to fall to 9.75 to the dollar next year, explaining that “these are only indicative levels that reflect the direction of the currency.”
The weakness of the Turkish currency is expected to increase inflationary pressures in the economy with the rise in energy prices. Experts believe that the Turkish economy, whose deterioration was reflected in the high cost of living coupled with the problem of unemployment, will go through a more difficult period, which will lead to a significant rise in the poverty rate.
Sylva Demiralp, professor of economics at the Turkish University of Koç, pointed out that the frequent changes in jobs in the central bank are seen as an “extra blow to credibility,” adding that this perception leads to an escape from the Turkish lira and that the main tool in monetary policy is credibility. It is this credibility that ensures price and financial stability.
Economist Ugur Gurses likened the central bank to a “glassware store in the country. When politics enters it, the conditions of the country are shattered and spilled.”

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