The Central Bank of Turkey cut its one-week repo rate for the second straight time today. The central bank lowered the rate by 325 basis points to 16.50 percent.
Today’s rate cut might seem dovish on the surface, but the Turkish lira reacted positively with gains of nearly 1 percent against the EUR. This slightly odd pricing behaviour could be linked to i) unconventional measures not being introduced ii) a “relieve” reaction given the extreme range of cut projections iii) markets being positioned for more aggressive cuts that expected by economists and iv) market participants believing in a more benign inflation outlook, noted Nordea Bank in a research report.
Even if a rate cut on the surface could be justified as G10 central banks have been dovishly repriced and inflation has been trending down, today’s rate cut appears too aggressive.
“Overall, we therefore remain sceptical about the outlook for the lira. We think more and too much easing is coming for the rest of the year and 2020, and on top of that, we have a defensive view on Emerging Markets and risky assets in general”, added Nordea Bank.