(Bloomberg) — Don’t just blame President Recep Tayyip Erdogan if Turkey’s central bank decides again to err on the side of lowering interest rates more than anticipated.
Governor Murat Uysal may not quite match the record cut he delivered during his first meeting at the helm in July. Most of the economists surveyed by Bloomberg forecast a reduction of 275 basis points on Thursday. But a sizable minority sees a bigger move, and others point to the risk of another dovish surprise.
The central bank won’t need to borrow from Erdogan’s unconventional playbook for monetary policy, which holds that lower rates bring price growth down. In real terms, Turkey’s benchmark is now double the average for its emerging-market peers, providing room for 4 percentage points of easing relative to the central bank’s year-end forecast for inflation, according to Bank of America Corp (NYSE:).
“Given the dovish stance of the authorities, the risk is for a more front-loaded cutting cycle,” said JPMorgan Chase (NYSE:) & Co. analyst Yarkin Cebeci. While expecting a 275 basis-point cut on Thursday, he said “it could easily be more.”
Forecasts for a rate cut in the Bloomberg poll of 31 analysts range between 125 and 400 basis points. When Uysal slashed the benchmark by 425 basis points in July, the median estimate was for easing of 250 basis points. It was the first reduction since 2016 and the biggest since a shift to inflation targeting in 2002.
The new governor has already signaled that more cuts were on the cards but also vowed to preserve “a reasonable rate of real return” for investors. Turkey’s price growth, currently at 15%, will end the year at 13.9%, according to the central bank’s latest forecast.
A rare calm has settled over the market before the decision. After soaring to an eight-month high ahead of the central bank’s July meeting, volatility in Turkish stocks has come down before this week’s gathering. The lira ended four days of losses with a gain of 0.3% against the dollar on Wednesday.
Erdogan is unlikely to be far from the minds of the seven members of the Monetary Policy Committee. Just days ahead of this week’s meeting, Erdogan suggested Turkey will lower borrowing costs to single digits soon and inflation will follow suit.
The irony is that he may be right for all the wrong reasons. Much of the credit for the disinflation and the room to cut rates should go to the outsized monetary tightening delivered last year.
Confronting more restless voters and other political challenges, Erdogan will have little patience for a “more moderate” easing cycle, according to Wolfango Piccoli, co-president at Teneo Intelligence. “Market complacency” is only likely to embolden him, he said.
“In his fight for political survival, Erdogan will not hesitate to use whatever means he has available,” Piccoli said. “This week’s tool will be monetary policy.”