Turkey’s Central Bank (CB) wrong-footed markets on Thursday by cutting its policy rate to an all-time low to bolster the economy while also acting to support the ailing lira, driving the currency sharply lower in moves deemed risky and confusing by analysts.
At an emergency monetary policy committee meeting the bank cut its one-week repo rate to 5.75 per cent from 6.25 per cent, but sought to offset any negative impact on the lira by raising its overnight borrowing rate to 5 per cent from 1.5 per cent and starting foreign exchange selling auctions.The currency fell sharply, however, as markets mindful of inflationary pressures in Turkey’s still fast-growing economy struggled to digest a raft of new policy moves and rued a lack of clear communication from ratesetters.The lira has fallen some 10 per cent this year, hit by mounting concerns over Turkey’s soaring current account deficit which could reach more than 10 per cent of GDP this year from last year’s 6.7 per cent and amid doubts over the central bank’s unorthodox policies. All 18 analysts in a Reuters poll had forecast the bank would raise its overnight borrowing rate from 1.5 per cent, but only one forecast a cut in the repo rate.
“The cut in the benchmark rate to stimulate the economy was a surprise, as we have not seen any major signs that it has cooled down yet,” said analyst Elisabeth Andrew at Nordea.
“The markets are worried about an overheated economy and this decision makes markets naturally more worried and confused and questions the central bank’s credibility.”
The lira weakened to 1.7310 to the dollar after the bank’s announcements, down from 1.6950 before the decision and close to a more than two-year low of 1.7340 it hit in late July.
While a higher overnight borrowing rate could help reinvigorate carry trades - where investors borrow in low-yielding currencies such as the yen to then invest in higher yielding currencies such as the lira - confusion about policies hurt the currency on Thursday.
“Given the lack of full communication issues such as core inflation and domestic risks, there must be more behind this than meets the eye at first,” said Simon Quijano-Evans at ING Bank.
From / Gulf Today