Wobbly lira doesn't deter the CBRT

TURKEY - In Brief 19 Feb 2020 by Murat Ucer

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The Monetary Policy Committee reduced the policy rate (weekly repo) by another 50 bps today, bringing the cumulative cuts since July to 1325 bps, and the policy rate to 10.75% (see chart). Probably reflecting the ongoing pressures on the currency, it was a little hard to speak of a consensus before the meeting, with the median expectation varying among the polls between no change, and 50 bps cut. You may recall that our (baseline) forecast was a “25-50” bps cut, as discussed in our Sunday post (of February 16th).So, we are not too surprised with today’s decision, in the light of our --and at this stage most analysts’-- working rule: keep going toward single digits, as long as there is no major currency turbulence and/or it remains “manageable” with some state bank intervention and other means. There is little doubt that this defiance of the well-known “Unholy Trinity” of international macroeconomics (see exhibit below) is getting riskier by the day, but given the prevailing theory at the “Palace”, i.e. “low rates lead to low inflation and then to higher investment and higher growth”, very clear choices appear to have already been made around the Trinity: get interest rates to single digit levels as soon as possible to boost growth while ensuring lira stability through “whatever it takes” means, like, among other things, de facto elimination of the swap market and sizeable F/X intervention through state banks. Parenthetically, there is considerable uncertainty around the size or scale of the latter, but we reckon/hear that F/X sales might have already reached some $10-$15 billion this year, based on BRSA open F/X position data, as well as CBRT’s daily net foreign asset ...