Turkish political turmoil triggers selling, Wall Street lowers expectations for central bank interest rate cut magnitude.

The confrontation between the Turkish court and the main opposition party continues to escalate, triggering market sell-offs. Subsequently, several Wall Street banks have adjusted their expectations, believing that the pace of interest rate cuts by the Turkish Central Bank will slow down. Morgan Stanley and JPMorgan predict that at the Monetary Policy Committee meeting on September 11, the Turkish Central Bank will lower the benchmark interest rate by 2 percentage points; whereas their previous expectations were a cut of 300 basis points (3 percentage points). This adjustment in expectations highlights that recent political turmoil is prompting investors and financial institutions to reassess the prospects for Turkey's interest rate cutting cycle. The Turkish Central Bank resumed interest rate cuts in July, lowering the benchmark interest rate by 3 percentage points to 43% at that time. Earlier this week, a court ruling triggered widespread market sell-offs - the ruling may lead to a leadership change within the main opposition party, the Republican People's Party, stirring up the market. The current turmoil has put the Turkish Central Bank in a particularly difficult position: policymakers must strive to maintain the stability of the Turkish lira exchange rate on one hand, and on the other hand push inflation to fall below 30% by the end of the year (while the official inflation target is 5%). JPMorgan analyst Fatih Akcelik stated in a report released on Wednesday: "The Turkish Central Bank may keep policy rates far above overall inflation levels to prevent further 'dollarization' of Turkish assets among the public, especially against the backdrop of recent political turmoil." He currently predicts that the Turkish Central Bank will cut interest rates by 200 basis points at each of the remaining three monetary policy meetings this year. The backdrop of the recent plunge in Turkish asset prices is as follows: the latest GDP data shows that domestic demand in the country was strong in the second quarter, even before the Central Bank started cutting interest rates. In addition, although Turkey's inflation rate fell in August, the decline was lower than market expectations, remaining at a high level of 33%. Following the announcement of the court ruling this week, in order to alleviate the pressure of lira depreciation, Turkish state-owned banks have sold about $5 billion in foreign exchange through non-public operations - this move is clearly aimed at preventing a disorderly decline in the lira that could trigger mass purchases of dollars by the public. As of the time of writing, the lira exchange rate remains stable at 1 US dollar to 41.1757 lira. After experiencing a two-day decline (with a cumulative decline of nearly 5%), the main Turkish stock index opened higher on Thursday. Morgan Stanley analyst Hande Kucuk pointed out: "Recent macroeconomic data and domestic uncertainty determine that the Turkish Central Bank needs to reduce the size of interest rate cuts." She said that the Central Bank would want to ensure that "market volatility remains within a controllable range." However, not all analysts have quickly revised down their rate cut expectations. Barclays economist Ercan Erguzel still maintains his original prediction, believing that the Turkish Central Bank will cut interest rates by 250 basis points this time. He said on Wednesday: "Nevertheless, we still need to observe the impact of yesterday's political developments on holdings of non-residents (foreign investors) and residents (domestic investors)." According to Erguzel, as of Tuesday's close, the total withdrawal size of Turkish "carry trade" positions was around $3 billion. In March of this year, the Turkish market went through a period of turmoil: Istanbul Mayor Ekrem Imamoglu, seen as the strongest opponent of Turkish President Recep Tayyip Erdogan, was arrested on charges of corruption and terrorism (Imamoglu denied the charges). This incident forced the Turkish Central Bank to pause the interest rate cutting cycle that started at the end of last year, while Turkish banks sold over $50 billion in foreign exchange to support the lira exchange rate. At that time, capital outflows were mainly driven by foreign investors.