The easing cycle is alive and well in EM counties with Turkey moving forward with a significant reduction. In an unexpected
move, the Central banks of Turkey chopped its benchmark one-week repo rate by 325bp. The policy rate now stands at 16.5% from 19.75% bringing
the total cuts to 750bp in this easing cycle. There is a general relief that the policy rate slash was not deeper and more destabilizing. While
given low global interest rates, the markets are more tolerant of large rate cuts. However, without high-interest rates, Turkish asset is
exposed to sell-offs. A new guidance sentence from the interest rate announcement indicated that the front-loading of monetary easing is
over and further policy decisions would be data-dependent, specifically the direction of inflation. The CBRT detailed that "at this
point, the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path." Overall,
the new central banker team did not strengthen their credibility. The larger than expected reduction indicates that President Erdoğan is
in clear control of policy setting. Erdogan has indicate that interest rates would be reduced to the single digits over the coming month. In
the mid-term CBRTs aggressive policy easing will challenge the market and amplified scope for policy error. The October decision will be
critical in determining how quickly their credibility will develop. Yet with the political pressure “coming in hot” we doubt CBRT can
achieve independence..
By Peter Rosenstreich
