On Thursday, Turkey’s central bank unexpectedly slashed the policy rate massively, by 200 bp to 16%.
The Central Bank of the Republic of Turkey (CBRT)’s move was twice as the most dovish predictions by a Reuters poll which expected the policy repo rate to be lowered by only 50-100 bp.
Many analysts criticized the move, calling it reckless and wrong since as a result, the Lira hit the fresh record low and left the country’s real yields sharply negative.
The Lira dipped by up to 3% to a record 9.501/USD before paring some losses. So far in 2021, the currency has lost 22% of its value with most of the fall starting in September when CBRT started giving dovish signals. It has also been among the worst performers for several years.
Turkey, heavily reliant on imports, seeing its inflation via imports gets higher on the back of the depreciation on Lira.
The rate-slash also drives Turkey’s real interest rates to the most negative level across the emerging markets. The country’s credit default swaps (CDS) soared to the highest level in months at 450 bp. Yields on the benchmark 10-year bond jumped to 20.41% from 19.98 before the cut.
Piotr Matys, a senior FX analyst at In Touch Capital Markets, said the cumulative 300 basis points of cuts since last month, as well as the latest monetary policy committee (MPC) shake-up, has caused further damage to Turkey's reputation among foreign investors.
