Piotr Matys, emerging markets FX strategist at Rabobank, suggests that before the ECB announces its decision at 12:45bst on Thursday, Turkey’s central bank is widely expected to cut its policy rate on the same day.
“We forecast a 300bps move to 16.75% which is slightly above the consensus expectation for a 275bps cut. The risk is firmly skewed in favour of a much bigger cut after the influential Turkish President Erdogan said over the weekend that the policy rate will be lowered to single digits “in the shortest period.” While the massive 425bps cut in July was absorb by the market, on this occasion a move that significantly exceeds expectations may be far less tolerated amid growing concerns that the Erdogan administration intends to rely on significantly lower interest rates to spur credit growth.”
“A very ambitious target of 5% for 2020 GDP growth set by President Erdogan implies that he envisages a V-shape recovery generated by a strong credit impulse rather than comprehensive economic reforms that would also address Turkey’s structural issues. These include C/A deficit and strong inflationary pressure when consumer spending is stimulated.”