Another 100 bps cut from the CBRT

TURKEY - In Brief 22 Sep 2022 by Murat Ucer

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The CBRT/MPC cut the policy rate (one-week repo) by another 100 bps to 12% (simple) today. While this wasn’t the consensus expectation, we are not terribly surprised, as we had given more than even odds to such a move (see last Sunday’s Tracker). The MPC statement is almost identical to the previous one, except for its stronger emphasis on loss of growth momentum, which appears to be the key motivation behind today’s decision. Cutting rates under the circumstances is entirely baffling, of course, in terms of basic economic logic (a point on which our readership needs no convincing), but we doubt that it is even consistent with the Bank’s objective – of presumably stimulating growth through domestic demand. After all, the transmission mechanism of commercial credit is broken, with “credit crunch-like” conditions prevailing, we hear, for a good chunk of the companies (excluding SMEs and/or exporters), while boosting consumption through consumer credit – if that is what’s intended – is awfully misguided and counterproductive, because that would lead to higher inflation and a wider current account deficit; further TL weakness, lower confidence/demand, and hence, a vicious cycle of sorts. The bottom line is that as today’s decision has shown yet again, the CBRT remains on a very risky course. Given the current monetary policy settings, which could in fact involve a continuation of the rate cuts, and with growth remaining Ankara’s top priority, we still believe a “currency event” is highly likely before May 2023.