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April 13, 2018 www.intellinews.com I Page 3
the global financial crisis. They cited Bloomberg HT television data detailing how average interest rates on overall deposits stood at 12.81% at the end of March. Turkey’s high inflation, at around 10.2%, has caused interest rates on loans to rise towards an annual 20%, curbing demand for cred- its from businesses and consumers.
Not convinced by rhetoric
Not everyone is convinced that, enveloped by the sheer heat of Erdogan’s paint-stripping oratory, the Central Bank of the Republic of Turkey (CBRT) will fail to tighten policy. On April 11, Capital Econom- ics said it was pencilling in a 100bp hike it predicts will be introduced in the Turkish central bank’s late liquidity lending rate at the April 25 meeting of its monetary policy committee (MPC). Its sen- ior emerging markets economist William Jackson said he had concluded that even amid the forceful rhetoric, the regulator can be expected to go ahead and tighten the late liquidity rate to 13.75%.
Two camps
Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, said in a note that the government’s seeming prioritisation of more stimulus measures over "re-balancing" continued to unnerve investors. He added: “There are two camps in the Erdogan administration: the first in the go for growth camp, around [senior advisor to the president] Yigit Bulut; and then the more orthodox team rolled out to talk to foreign investors... who talk in favour of the need for ‘rebalancing’.
“At the moment, as per the administration's ac- tions, the former camp seems to be winning—the Erdogan administration seems to be going for growth, at all costs, and without a willingness to hike policy rates, the lira has to take the strain.”
JPMorgan Chase & Co. said in a note that it remained underweight in Turkey’s currency and bonds. It pointed to a current-account deficit that it forecasts will expand to 6% of output in 2018 and a deteriorating inflation outlook. The nation needs a “sizeable” foreign-exchange adjustment and credible policy response, which may not be
He said in a note: “Mounting concerns about Tur- key’s current account deficit as well as debt prob- lems in the corporate sector are likely to keep the lira under pressure over the coming weeks. As a result, we now expect the central bank to respond by tightening monetary policy... In an update sent [on April 5], we argued that the lira — which at that point had depreciated to 4.04/$ — needed to fall further, to around 4.25/$, to trigger a response from the central bank. Since then, the lira has continued to tumble and, at 4.15/$ at the time of writing, has already covered half the ground we suggested was needed to prompt a reaction from the central bank.”
“Admittedly, the government is starting to exert pressure on the central bank not to raise interest rates,” Jackson continued in his bulletin to investors. “The authorities seem to have shifted their focus to maintaining strong rates of growth in the economy. And earlier this week, President Erdogan talked of the need to lower interest rates to boost investment. Nonetheless, this isn’t necessarily a barrier to rate hikes. Indeed, policymakers at the central bank faced similar
pressures before they raised interest rates in early 2014 and again in early 2017.”
Ending on a note of caution, Jackson also ob- served that, “if the MPC doesn’t tighten policy, history suggests that the fall in the lira will gather pace in the immediate aftermath of the decision, which could force policymakers to hold an emer- gency meeting to raise rates”.
Lutz Roehmeyer, who helps oversee about $14bn at Landesbank Berlin Investment, referred to a “mismanagement of the currency” when talking to Bloomberg on April 9, adding: “[It] leads to a loss of confidence in the purchasing power of the lira which is hard to cure.”
“Only massive one-off hikes can heal this situa- tion, which is of course not popular as it slows the economy,” said Roehmeyer.