​Predictably, MPC cuts more than predicted

TURKEY - In Brief 24 Oct 2019 by Murat Ucer

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At today's meeting the Monetary Policy Committee (MPC) cut the one-week repo rate (policy rate) by 250 bps to 14% down from 16.5%, bringing the cumulative cuts over the past three meetings to 1000 bps, which takes the policy rate down to its lowest level since May 2018 (see chart below). Today’s cut was more than what the consensus held, but is broadly in line with our forecast shared in our Sunday note. We don’t like quoting ourselves, but it may be useful to do so in this case, because we think things have played out more or less as we had surmised there, and has implications for the future:“So, what will happen on Thursday? A lot depends on the negotiations between the CBRT staff, which will likely suggest a very modest – like 50 bps - or no cut, and Mr. Erdogan, which will ask for another 200-250 bps cut, if not more. While we would not rule out the CBRT winning and executing a relatively prudent move, we think President Erdogan will get his way, as the Bank cuts rates by another 200 bps or so and the state banks are called in to support the lira.” To be sure, Mr. Erdogan’s hands have been strengthened since we wrote the above, thanks to favorable developments on the Syria front from a market perspective, but we still think the move is too aggressive to be justified under the circumstances. Among other reasons, highly uncertain inflation and currency outlooks, as well as geopolitical risks that still remain elevated, would advise for a much more modest cut or to stay on hold altogether.The Bank’s justification for the move seem two-fold. First, according to the current statement, the Bank now forecasts yearend inflation “notably” below the projections of the July I...