Eric Arispi, senior Turkey director at Fitch, told Reuters that the easing of monetary measures was a premature move, and appeared to have been politically motivated without leaving the central bank with the margin needed to protect the faltering lira.
The central bank cut its key interest rate to 16% from 18% on Thursday even though inflation has reached nearly 20%, sparking a wave of rapid selling of the lira, the value of which has fallen to new record lows.
“For us, the focus is now on knowing to what extent this move in the wrong direction of (monetary) policy, or this premature monetary easing, can lead to reduced external financing of the economy, especially for banks and companies,” Arespi said during the interview.
“If this is the case, this could lead to continued international pressure on reserves for a while,” he added.
He added that although net foreign exchange reserves have risen since April from less than $10 billion, it “does not leave much room for the central bank to build a very strong defence” to defend the currency if necessary.
Fitch revised Turkey’s outlook to “stable” from “negative” in February while keeping the rating at “BB-“, a month before President Recep Tayyip Erdogan dismissed the central bank governor and replaced him with Shihab Kavcioglu, who shares his unorthodox view that High interest rates cause inflation.