Turkish President Recep Tayyip Erdoğan, December 5 2019. Picture: HANDOUT VIA REUTERS/MURAT CETINMUHURDAR/PPO
Turkish President Recep Tayyip Erdoğan, December 5 2019. Picture: HANDOUT VIA REUTERS/MURAT CETINMUHURDAR/PPO

Istanbul  —  The easy part is probably over for Turkish central bank governor Murat Uysal after it delivered another interest-rate cut that exceeded forecasts.

Emboldened by lira stability and egged on by President Recep Tayyip Erdoğan’s calls for more aggressive easing, the monetary policy committee (MPC) reduced its key rate for a fourth time to 12% from 14%, exceeding predictions of most economists surveyed by Bloomberg.

But less than six months into his tenure, Uysal is feeling out the limits of the easing cycle, given his pledge to preserve “a reasonable rate of real return” for investors. On Thursday, the MPC removed a phrase used in an earlier statement that said its stance was, “to a large part”, consistent with the projected disinflation path, suggesting it could now move slower to loosen policy. The lira kept gains after the decision, trading 0.7% stronger against the dollar as of 5.52pm in Istanbul.

With inflation on the upswing again, Turkey’s real borrowing costs, the world’s highest when Uysal took over in July, may not provide much of a buffer against market sell-offs for too much longer.

Adjusted for prices, rates in Turkey are already below many peers and could turn negative in January, according to Crédit Agricole, whose Guillaume Tresca said, “It is not so attractive for foreign investors.” 

Currency crisis

The latest move brings the cumulative easing under Uysal’s watch to 12 percentage points, rolling back the dramatic rate hikes used by the central bank to fight 2018’s currency crisis. Erdoğan ousted his predecessor for not acting fast enough.

Until now, the lira has largely withstood the onslaught of rate cuts, its one-month implied volatility falling in December to the lowest in years. Still, worries abound among investors, with Turkey’s currency on track in December for the worst performance in emerging markets against the dollar.

“The bank will likely turn cautious in the near term, given likely stickier inflation readings with a less supportive base, low ex-post real policy rate, as well as ongoing high dollarisation and subdued capital flow outlook,” said Muhammet Mercan, chief economist at ING Bank.

Just as he’s done ahead of all policy decisions since installing Uysal, Erdoğan sounded off on monetary matters again in the days before this week’s meeting, saying, “We will be moving to single digits in interest rates in 2020.”

Erdoğan’s fixation on low rates was hardly the only reason for easing, with the economy just beginning to gain momentum after a recession. Even as inflation bounced back in November, it didn’t heat up as much as expected, ensuring that before this week’s meeting, Turkey still boasted one of the highest real rates in emerging markets.


Inflation began to soar in June 2018 after a crash in the lira touched off a surge in domestic prices across the import-dependent economy. After peaking at 25.2% in 2018, it plummeted into single digits before a pick-up to an annual 10.6% in November.

Price growth is likely to end 2019 near the lower edge of the central bank’s October inflation projections, or about 11%, “with risks around the disinflation path for 2020 being balanced”, the MPC said on Thursday.

Meanwhile, policymakers have also increased the number of their meetings in 2020 to 12 from eight in 2019, a decision that could allow them to move in smaller steps if they chase Erdoğan’s goal of single-digit rates.

“The script for the central bank to follow is cut as quickly as you can get away with, without sacrificing macro-financial stability, and get credit growth firing on all cylinders again,” said Timothy Ash, a strategist at BlueBay Asset Management. “The experience over the past 20 years in Turkey is that such a credit-driven growth model usually ends in tears.”