(Bloomberg) -- President Recep Tayyip Erdogan’s deal to secure a buffer zone in northern Syria may have also clinched another big cut in Turkish interest rates.
Little now stands in the way of the central bank’s third straight decrease after Erdogan’s agreement on Tuesday with Russian President Vladimir Putin. With the standoff defused, the lira is again on the mend, easing worries that the turmoil would halt a steep slowdown in inflation. The currency got another lift after Donald Trump said he’s scrapping recently imposed U.S. sanctions against Turkey.
While most economists surveyed by Bloomberg predict the key rate will be reduced by 1 percentage point to 15.5% on Thursday, a sizable minority sees a larger move. Governor Murat Uysal has delivered a bigger-than-forecast cut both times that he’s lowered rates since taking the job in July.
Before the escalation in Syria shook up Turkish markets, Erdogan had offered rare words of praise for the central bank. Turkey’s president remains fixated on lower borrowing costs, which he believes will curb inflation, and said he’s on the lookout for further monetary stimulus. He ousted Uysal’s predecessor for not easing fast enough.
“We still expect Turkey’s central bank to implement bold rate cuts given the window of opportunity provided by the inflation decline and the political pressure,” said Guillaume Tresca, a Paris-based strategist at Credit Agricole (PA:CAGR) SA who expects a 200 basis-points move.
‘Positively Surprised’
“We were positively surprised by the cease-fire agreement negotiated overnight, and the risk of escalation is declining in the short term,” Tresca said.
Turkish markets rallied after Russia and Turkey agreed to work together to take back large chunks of Syrian territory controlled by Kurdish forces. The day after the deal in Sochi, the lira appreciated to its strongest level against the dollar in over two weeks. It’s still the worst performer in emerging markets this month after Argentina’s peso.
A more stable lira and the effect of a high base of comparison pushed price growth into single digits in September for the first time in over two years. Adjusted for inflation, Turkey’s real rate is now far above its peers including South Africa and Russia.
After lowering rates by 750 basis points on his watch, Uysal recently signaled that the central bank might look to moderate its pace.
A slight acceleration in inflation is expected to bring it into low double digits by year-end, according to base-case scenarios of both the government and the central bank.
Although helped by growing geopolitical calm and the dovish shift by major central banks including the Federal Reserve, Turkish policy makers might still ease up the pace of rate cuts this month, according to Carla Slim, an economist in Dubai at Standard Chartered (LON:STAN) Plc.
“We think the Turkish central bank will likely see through the resurgence of the political risk premium related to Turkey’s military incursion in Syria,” said Slim, who predicts a cut of 100 basis points. The “front-loading of the easing cycle seems over given an expected pick-up in inflation towards year-end.”