A risky emergency cut from the CBRT

TURKEY - In Brief 17 Mar 2020 by Murat Ucer

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At an emergency meeting convened today --two days ahead of its regular meeting, the CBRT/MPC reduced the policy rate (weekly-repo) by 100 bps to 9.75% (see chart). The Bank also came up with a number of measures targeted at easing both lira and foreign currency liquidity, as well as trying to ensure proper flow of credit to the economy.While these latter sets of measures are generally welcome (link here), which, incidentally, are likely to mostly benefit the state banks, we think the rate cut constitutes a risky and counterproductive move in the current context. The Bank’s statement on the rate decision (link here) presents a highly positive narrative on the state of the economy as well as on the inflation outlook basically to justify the rate cut (e.g., “[t]he achievements of the rebalancing process have increased the resilience of the Turkish economy against unfavorable shocks” or “downside risks on the year-end inflation projection have increased”), but the situation on the ground looks quite different to us.After all, the lira weakened quite substantially since the beginning of this year (close to 10% against the basket), reserve losses have already been quite sizeable (very roughly speaking, around $15 billion at least so far this year), there has been a huge jump in country risk premium in recent weeks (by about 300 bps on the 5-year CDS), the corporate sector, despite some moderate deleveraging, still remains highly indebted in foreign currency, and stickiness in inflation dynamics continues, which combined with lira weakness in the year to date and potential supply disruptions, suggest that inflation outlook is arguably a lot more cloudy than the Bank wants us ...