The dismissal of two deputy governors and Monetary Policy Committee (MPC) member Abdullah Yavas on Wednesday was reportedly based on their opposition to rate cuts – Kucuk was the only member of the committee who voted against the September 100bp rate cut. This decision reinforces the market’s expectation of another cut at the 21 October MPC meeting, in line with our longstanding view. We expect another 100bp easing after that.
Meanwhile, political instability is likely to rise into year-end, both from a foreign policy and domestic perspective. Internationally, Erdogan’s talk of a Syria offensive comes as a surprise and could result in frictions with the U.S., which backs Kurdish militants in the region that are opposed by Turkey. Domestically, political instability is likely to rise as the opposition is finally kicking itself into action, taking advantage of the fact that support for Erdogan is falling - the AKP has around 31-33% of the vote compared with 42.6% at parliamentary elections in 2018 and AKP ally the MHP has less than the 10% threshold required to enter parliament. The six opposition parties have agreed to focus on the independence of the judiciary, media and academia, laws governing elections and political parties, and boosting democracy and the separation of powers. They also want to restore Turkey to a parliamentary system of government and plan weekly meetings to agree shared principles by year-end. A united opposition is unheard of in Turkey so this should send shivers down Erdogan’s spine and spook the markets.