Fitch: Turkey’s sudden and large interest rate cut is another step in the wrong direction

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An official at the credit rating agency Fitch today described Turkey’s surprisingly large interest rate cut this week as another step in the wrong direction and that the agency is monitoring the extent of the damage this measure could do to bank and corporate finance.
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 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 Erdoğan fired the central bank governor and replaced him with Shihab Kavcioglu, who shares his unorthodox view that high interest rates cause inflation.





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