Fitch eyes fallout from Turkey rate cut 'missteps', official says

ISTANBUL (Reuters) – Turkey’s surprisingly aggressive interest rate cut this week was another “policy misstep” and Fitch Ratings is watching how much it hurts financing for banks and companies, an official at the agency said on Friday.

Erich Arispe, a senior director who covers Turkey for Fitch, told Reuters the monetary easing was premature, appears to have been influenced by politics and leaves the central bank little room to protect the plunging lira.

The central bank slashed its key rate to 16% from 18% on Thursday despite inflation running at nearly 20%, setting off a selloff in the lira to fresh record lows.

“For us the focus right now is to see to what extent these policy missteps, this premature easing, could translate into reduced external financing for the economy, especially for banks and corporates,” Arispe said in an interview.

“If that is the case, it could lead to a period in which you see sustained international pressure on reserves.”

Though net foreign currency reserves have edged higher since April from below $10 billion, “it does not leave much room for the central bank to mount a very strong defence” of the currency if needed, he added.

Fitch adjusted its “BB-” junk rating on Turkey to a “stable” outlook from “negative” in February, a month before President Tayyip Erdogan replaced a hawkish central bank governor with Sahap Kavcioglu, who shared his unorthodox view that high rates cause inflation.

Fitch’s sovereign rating is two notches higher than that of Moody’s and one above S&P, which is set to publish an update on Turkey later on Friday.

‘POLITICAL ELEMENTS’

Erdogan, a self-described enemy of interest rates, has fired three bank chiefs in 2-1/2 years and last week ousted three other policymakers, including two seen as opposed to the cuts. He has called for easing to boost credit, exports and jobs.

Arispe said that given yields on Turkish debt have only risen since the easing cycle began, the cuts have not helped economic activity and financing costs.

“The optics do not help,” he said, when Kavcioglu was photographed visiting Erdogan last week, hours before the three monetary policy committee (MPC) members were fired without explanation.

“It is difficult to dismiss that political elements are playing a role in the central bank decision process right now,” Arispe said. “Economic factors are not being taken into account first.”

The central bank said on Thursday it had little more room to cut rates and repeated that inflation pressure was temporary. Goldman Sachs and Barclays predict it will cut to 15% while others including JPMorgan have raised their inflation forecasts.

Arispe said there was upside risk to Fitch’s 17.2% year-end inflation forecast given the 12% lira depreciation in the last two months, and the “surprising” magnitude of rate cuts.

“If faced with significant balance-of-payments pressures we expect an orthodox policy response and rate hikes,” he said.

“The challenge is that this repeated cycle of volatility, uncertainty, followed by sharp adjustments in interest rates have a toll on the economy” including public finances, which are strong, he added.

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