Turkey’s central bank slows pace of easing after failed coup

By bne IntelliNews July 19, 2016

Turkey’s central bank delivered another rate cut on July 19, days after a failed coup attempt shook the country and rattled its financial markets. The decision by the bank’s Monetary Policy Committee (MPC) to cut the overnight (ON) lending rate by 25bps to 8.75% suggests policy makers view the market volatility as short-lived, analysts say.

Still, apparently realising the challenges ahead, the bank slowed the pace of the rate cut. Last month, it slashed the ON rate by 50bps. Economists surveyed by Bloomberg had revised their rate cut expectations to 25bps from a previous 50bps following the coup attempt.

The bank kept the main policy rate (one-week repo rate) unchanged for the 17th month in row at 7.5%. The overnight borrowing rate was also left on hold at 7.25%.

The bank did not provide a detailed analysis of the possible impact of the failed putsch, but only noted that domestic developments have led to fluctuations in financial markets. The recent liquidity measures have alleviated the volatility in financial markets, the bank said in a statement released after the MPC meeting.

The lira, which was trading at 2.9703 before the bank’s decision, weakened to 2.9855 following the rate cut. The currency, however, pared some of its loses to trade at 2.9812 per dollar at 2.50pm local time. The main stock exchange index, BIST-100, rose to 78,072 from 77,857.

Market developments will be closely monitored and the necessary liquidity measures will continue to be taken to support financial stability, the bank also said in the statement.

Ahead of the bank’s decision, Economy Minister Nihat Zeybekci told Reuters that he expects the central bank to continue with bold rate cuts, but he would understand if it hesitated following the failed coup attempt. The government has been adding pressure on the central bank to continue its easing cycle to support the slowing economy.

Given today’s move, it looks like monetary conditions will be loosened a little further in the coming months, analysts at Capital Economics say in a note. “But we remain concerned about how sustainable the easing cycle is,” the analysts warn, saying that rising political risk make Turkey more vulnerable to bouts of capital outflows and that expectations are that inflation will stay well above the central bank’s end-year target of 5%. “All told, while further policy easing in the next few months seems likely, there’s a clear risk that this will have to be reversed before too long.”

Meanwhile, private lender Yapi Kredi has cancelled its $550m seven-year 4.5% Eurobond that was due to settle on July 19. The bond was priced on July 12, three days before the attempted military coup.

Turkey’s Deputy Prime Minister Mehmet Simsek argued on July 18 that the impact of the failed coup on the economy would be short-lived. Moody’s, however, said the same day it is putting Turkey’s credit ratings on review for downgrade. Shortly before Moody’s announcement, Barclays’ analysts estimated that if Turkey loses its investment-grade rating, investors could dump $3.2bn of Turkish bonds, according to Bloomberg.

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