Fitch sees fallout from Turkey rate cut'missteps', according to an official
Fitch Ratings is watching how much it hurts banks and businesses' financing, according to an official at the agency on Friday. Turkey's unusually aggressive interest rate cut this week was another "political misstep," according the official.
Erich Arispe, a senior director who covers Turkey for Fitch, told Reuters that the monetary easing was premature, appears to have been driven by politics, and leaves the central bank little room to preserve the plunging lira.
The central bank cut its key rate to 16% from 18% on Thursday despite inflation peaking at nearly 20%, launching a selloff in the lira to new highs.
"For us, the focus right now is to see in what degree these policy lapses, this premature easing, may result in reduced external funding for the economy, especially for banks and corporates," Arispe said in an interview.
If that's the case, it may result in a period where there'll be sustained international pressure on reserves," he added.
Though net foreign currency reserves have risen from less than $10 billion in April, "it does not leave much room for the central bank to mount a very strong defense" of the currency if needed, he added.
Fitch raised its "BB-" junk rating on Turkey to a "stable" outlook from "negative" in February, despite President Tayyip Erdogan replacing hawkish central bank governor Sahap Kavcioglu, who shared his unorthodox view that high interest rates cause inflation.
Fitch's sovereign rating is two degrees higher than Moody'' and one above S&P, which is set to release an update on Turkey later on Friday.
'POLITICAL ELEMENTS' are described as a set of elements which are essential to the prosecution.
Erdogan, a self-described anti-interest rates opponent, has fired three bank chiefs in 2-1/2 years and removed three other policymakers last week, including two who oppose the cuts. He has called for easing to boost credit, exports, and employment.
Arispe stated that, given that the yields on Turkish debt have only risen since the beginning of the easing cycle, the cuts haven't helped economic activity or financing costs, which have remained low since then.
"The optics don't 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's difficult to overlook that political elements are playing a part in the central bank decision process right now," Arispe said. "Economic factors are not being taken into account first," according to the statement.
The central bank said on Thursday that it has little more room to cut rates and that inflation pressure is temporary. Goldman Sachs and Barclays predict it will fall to 15%, while others, like JPMorgan, have raised their inflation forecasts. Read more
Fitch's annual inflation target of 17.2%, according to Arispe, a result of 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 increases," he added.
"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.