By Behiye Selin Taner
ISTANBUL (Reuters) – The Turkish central bank is expected to cut its key interest rate by 250 bps from its current 24% on July 25, a Reuters poll showed on Friday, with dovish comments from the new governor encouraging expectations of a significant reduction.
President Tayyip Erdogan sacked Central Bank Governor Murat Cetinkaya on July 6, reigniting concerns over political interference in monetary policy and boosting expectations of rate cuts to revive the recession-hit economy.
The median forecast compiled from 23 institutions showed economists expected a 250 basis point rate cut in the policy rate at this month’s meeting, with forecasts ranging between cuts of 100 bps and 500 bps in the one-week repo rate.
A previous Reuters poll last week had already showed that economists expected deeper rate cuts this year after Cetinkaya’s dismissal. The median forecast then was for a 200 bps cut on July 25.
Turkey’s benchmark interest rate was hiked to 24% last September to stem a sharp fall in the lira. The Central Bank has since left it unchanged as the economy tumbled into recession, to prevent renewed losses in the currency.
Murat Uysal, Cetinkaya’s deputy, replaced him as governor.
Uysal hinted at rate cuts in his first remarks after taking office, saying he expected disinflation to continue in 2019 on the back of declining cost pressures.
The consumer price index fell to 15.72% year-on-year in June, off a 15-year-high above 25% in October. It was fuelled by a currency crisis which resulted in the lira losing nearly 30% of its value against the dollar last year.
The dovish comments from the new governor, the improvement in inflation data and the lira’s stabilisation were the main drivers of Morgan Stanley’s revision of its forecast to a 250 bps cut at the July meeting from a previous 100 bps.
“We expect a 200bp cut at the September meeting to 19.5% and another 200bp cut in October to 17.5%,” Morgan Stanley said in a note.
Erdogan said that Cetinkaya, who was due to serve until 2020, had made decisions for which a high price was paid and was dismissed as he did not follow instructions on monetary policy.
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 was 18%, down from a forecast of 20% in last week’s poll. The latest forecasts ranged between 15% and 20%.
The central bank will announce its policy rate decision on July 25 at 1100 GMT.
(Writing by Ezgi Erkoyun; Editing by Daren Butler)