Eric Arispi, senior Turkey director at Fitch, told Reuters that the easing of monetary measures was a premature step, and appeared to be politically motivated without leaving the central bank with the margin needed to protect the faltering lira.
The central bank cut the key interest rate to 16% from 18% on Thursday, despite inflation reaching nearly 20%, sparking a wave of rapid selling of the lira, whose value has fallen to new record levels.
“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 the 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.
Wall Street bank JPMorgan said it expects Turkey’s central bank to cut interest rates by another 100 basis points in November and sharply raise its inflation forecast.
“Such initial easing indicates that lowering inflation in a rapid manner is not a policy priority,” JP Morgan’s Yarkin Sebeshi said in a note to clients.
“We fear that this step will only enhance price pressures, and we have revised our inflation forecasts to 19.9 percent for this year and to 16.4 percent in 2022,” he added.
JPMorgan had previously forecast that inflation would reach 16.7 percent by the end of 2021.