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Southeast Europe
May 18, 2018 www.intellinews.com I Page 15
that when faced by rising inflation, rates need to be increased. He argued that high interest rates cause inflation. Now maybe in stagflating DM economies there might be some logic to go against orthodoxy, but certainly not in Emerging Markets. And surely at times like this with the lira under the cosh, with a large current account deficit and external financing requirement/gap, now is certainly not the time for experimentation.”
Ash also remarked that Erdogan should “at least [be given the] credit for saying what he thinks — reveal- ing his true thoughts on the economy and interest rates. Actually in some respects it is refreshing—as normally policy makers when they meet investors tell them what they want to hear, even if they know actual policy delivery is unlikely in practice.”
The strategist also took on the question of why Erdogan felt the need to send “such a market un- friendly message” to investors. He concluded: "The answer I guess is that the message was not meant for the foreign audience but the local audience [in advance of the early elections]. He wanted to send the message that he still has allies in the UK, and particularly the May government, but also that he will not be browbeaten by the market in terms of views. Erdogan has conviction in his views that high interest rates cause inflation, and are anathema to his constituency, and he was happy, almost proud to explain those views to foreign investors. But I guess he assumed that talking tough to foreign investors
in London — the interest rate lobby — would still go down well with his core constituency in Turkey.”
Circuit breaker
Henrik Gullberg, a strategist at Nomura Interna- tional, told Bloomberg that a lot now hinged on the word “necessary” where CBRT monetary action
was concerned. “Now we just have to see whether ‘necessary’ is the same to the central bank as it is to the market. The market needs a circuit breaker, that circuit breaker can only be a prohibitively aggressive rate hike,” he said.
On May 15, Moody’s Investors Service reiterated that Turkey’s economy is overheating and that a lack of effective monetary-policy response to increasing inflationary pressures is affecting the central bank’s credibility.
“When we look at emerging markets at large, some countries are more vulnerable to shifts in investor sentiment and Turkey comes to mind because of its dependence on foreign capital inflows as a source of fuel for its economic growth,” Yves Lemay, manag- ing director for sovereign risk at Moody’s, said in an interview with Reuters in London.
Turkish banks’ foreign currency-denominated debt, mostly in dollars, stands at 22.5% of GDP, a ratio only behind banking centres Singapore and Hong Kong and South Korea among 21 major EMs in the Insti- tute of International Finance’s (IIF’s) database.