Turkey cenbank seen making deeper rate cut on July 25 after governor dismissal

Turkey‘s central bank is expected to make a deeper than previously expected cut in its key interest rate this month after President Tayyip Erdogan dismissed its governor, a Reuters poll showed on Wednesday.

Erdogan sacked Governor Murat Cetinkaya over the weekend, reigniting concerns over political interference in monetary policy and boosting rate cut expectations to revive the recession-hit economy.

The median of forecasts compiled from 18 institutions showed the economists expected 200 basis point rate cut in the policy rate on July 25 after the dismissal of Governor Murat Cetinkaya, compared to 100 basis points beforehand.

Erdogan told reporters that Cetinkaya, who was due to serve until 2020, had made decisions for which a high price was paid and he had not inspired market confidence, Haberturk reported on Wednesday.

Cetinkaya’s deputy, Murat Uysal, took over as governor.

The Turkish economy shrank sharply for the second straight quarter in early 2019 as a punishing currency crisis, persistent double-digit inflation and high interest rates took a toll on overall output.

“The replacement of the central bank governor to us suggests that there is likely to be a larger rate cut at the end of this month,” said Lee Hardmand, currency analyst at MUFG in London.

“I would expect interest rate cuts to be more frontloaded than previously,” he added.

Six of 18 economists who took part in the poll increased their rate cut forecasts after Cetinkaya’s dismissal. Three who previously predicted no change in the policy rate now expect a reductions in rates.

The remaining nine economists did not change their rate cut forecasts despite the change at the bank’s helm.

“The change in governor should not be directly linked to a change in the central bank’s monetary policy,” said Nilufer Sezgin, chief economist at Is Portfoy, which maintained its forecast for a 100 basis points cut.

However, Sezgin said Is Portfoy may review its forecast after Uysal makes his first public statements. He is expected to give a news conference in coming days.

The central bank hiked its policy rate by 11.25 percentage points to 24% last year to put a floor under the lira and rein in soaring double digit inflation. It has remained steady since September. The lira weakened 30% against U.S. dollar in 2018.

Investors have long been concerned over Erdogan’s influence over monetary policy, given his opposition to high interest rates. They also accuse the central bank of acting slowly to defend the lira at the time of the currency crisis.

The median estimate in the Reuters poll for the central bank’s year-end policy rate stood at 20%, down from a forecast of 21.5% in June. The latest forecasts ranged between 15% and 22%.

The central bank will announce its policy rate decision on July 25 at 1100 GMT. 

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