Page 75 - TURKRptJun19

Muhammet Mercan of ING Bank said in a research note entitled “Turkey’s central bank does not rule out tightening”. “However, Governor Cetinkaya has not ruled out the possibility of additional tightening with further risks of inflation and downward pressures on the currency. That is the major reason for the CBT leaving inflation forecasts unchanged in the April report, as implied by the governor. So, given the still fragile currency, [Turkey’s] continued dependence on external financing and ongoing inflationary risks, the bank would likely remain tight for a long while,” Mercan added. Dropping the emphasis placed on further tightening in an MPC release and then telling the markets just a week later that the change did not mean further tightening is not possible is just not normal behaviour for a central bank. “It was overall dovish, relative to what the market needs, with the notable exception of that comment on potentially tightening rates in the future,” Cristian Maggio, the London-based head of emerging-market strategy at TD Securities, was quoted as saying by Bloomberg. “The real question is rather why did the MPC feel the urge to remove an explicit commitment to possibly doing so in the statement last week, to replace it with an ambiguous sentence?”
Questions were also presented to Cetinkaya on the state’s price controls and imposed deposit/lending rates. However, he did not address those queries as the space allocated for questions was not sufficient.
All in all, Turkish government officials have maintained a “take it or leave it” stance since the start of the pre-local-elections campaign in December. It is understandable that it is tough for some market players to struggle to acknowledge the loss of ‘favourite toy’ Turkey, but that’s the way it is.
Meanwhile, what the Turkish government is planning when it comes to its upcoming external debt repayments remains a mystery. Last year, there was insistence that interest rates would not be increased—then, at the ‘last moment’, the policy rate was hiked by a huge 625bp in one go in September. Turkey has around $177bn in short-term external debt coming due in the next 12 months.
After April’s MPC statement, Goldman Sachs Group said the lira could depreciate 15% in the next 12 months. The TRY was the emerging world’s worst performer in April.
“The Turkish central bank’s messaging to investors has become even more confused over the past week,” Jason Tuvey of Capital Economics said on May 3 in a research note. “The decline in inflation will be welcomed by the central bank... But the central bank has little credibility and its communications are increasingly confused. In any case, recent experience shows that any changes in policy will be heavily dependent on what happens to the lira. There are a number of potential flashpoints on the horizon, including mounting tensions with the US and continued wrangling over the result of the recent local election in Istanbul,” Tuvey added in a separate research note entitled “Inflation drops, but limited room for policy easing”. Against this backdrop, Capital contends that, even if inflation falls further, there will be limited scope for policy easing this year. “Sell-offs in the lira could lead to periodic bouts of monetary tightening, most probably via the use of the rate ‘corridor,’” it said.
“Wishful thinking” Julian Rimmer of Investec on April 30 posted a note to investors on the central bank’s latest inflation report. It said: “The Central Bank of Turkey gave everyone a boost [on April 30] by promising that, contrary to all expectations, inflation would indeed still fall to 14.6% at year-end, despite running in excess of 20% for the first third of the year. My degree was English not Maths (‘I can not do hard sums, Sir’, will be one of many heart-rending quotes in the biopic of my so-called career in the City) but I think this requires some remarkable price action between now and year-end to be achieved. I don't blame [the central bank governor Murat] Cetinkaya for indulging in what is so much wishful thinking but if he thought that was going to reverse the lira's apparently inexorable decline then he is sadly mistaken. Still we know, he is
75 TURKEY Country Report June 2019 www.intellinews.com