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Fitch Eyes Fallout from Turkey Rate Cut ‘Missteps’, Official Says

Fitch Eyes Fallout from Turkey Rate Cut ‘Missteps’, Official Says

Friday, 22 October, 2021 - 17:15
Debris from houses is seen in front of brand new residential buildings at an urban transformation project area in Istanbul, Turkey October 22, 2021. (Reuters)

Turkey’s surprisingly aggressive interest rate cut this week was another “policy misstep” and Fitch Ratings is watching how much it hurts financing for banks and companies, an official at the agency said on Friday.

Erich Arispe, a senior director who covers Turkey for Fitch, told Reuters the monetary easing was premature, appears to have been influenced by politics and leaves the central bank little room to protect the plunging lira.

The central bank slashed its key rate to 16% from 18% on Thursday despite inflation running at nearly 20%, setting off a selloff in the lira to fresh record lows.

“For us the focus right now is to see to what extent these policy missteps, this premature easing, could translate into reduced external financing for the economy, especially for banks and corporates,” Arispe said in an interview.

“If that is the case, it could lead to a period in which you see sustained international pressure on reserves.”

Fitch adjusted its “BB-” junk rating on Turkey to a “stable” outlook from “negative” in February, a month before President Recep Tayyip Erdogan replaced a hawkish central bank governor with Sahap Kavcioglu, who shared his unorthodox view that high rates cause inflation.

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