The Central Bank of Turkey (CBT) cut its policy rate (O/N borrowing rate) by 50bp to 7.25%, in line with our expectations. The official statement said that monetary policy would maintain an easing bias for the time being and that interest rates could also decrease if Turkey's risk premium is declining.
The latter implies to us that the Monetary Policy Committee (MPC) would not hike interest rates proportionally if inflation would increase. In our view that MPC's intention is to permanently lower interest rates in Turkey. We believe the current recession provides a very good window of opportunity, in particular as the Turkish lira (TRY) has held up surprisingly well. That said, the immediate market reaction to these comments has been negative as TRY traded slightly weaker against USD. The stock market could also respond negatively when it opens tomorrow, although a positive performance by the Asian markets and the better than expected Philly Fed index could offset any adverse fallout from the CBT comments.