Page 3 - bne_newspaper_June_08_2018

Top Stories
June 8, 2018 www.intellinews.com I Page 3
Turkey’s central bank surprises markets with 125-bp pre- election rate hike
questioned in recent weeks given political pres- sure from President Recep Tayyip Erdogan for cheaper money despite the rapid weakening of the Turkish lira (TRY) and his statements that
he sees himself at the helm of monetary policy. Whether markets will trust Erdogan to leave the rate-setters to do their work in peace should he be elected Turkey’s first executive president with sweeping powers in the upcoming June 24 elec- tions is a burning issue that remains unresolved.
Commenting on the hawkish decision to hike, Timothy Ash of Bluebay Asset Management, said in an e-mailed note: “Finally, the CBRT [Central Bank of the Republic of Turkey] does the right thing, and surprises on the positive side. Hiking more than expected. This should help improve sentiment, and stabilise the market a bit into
the elections.”
“It is quite a positive surprise,” Kaan Nazli, a sen- ior economist at Neuberger Berman, told Reuters. “Nobody was expecting that. That will give them a lot of credibility ahead of the election.” He added: “The worries will remain that once Erdogan re- news his term he will be more interventionist in terms of central bank policy.”
“Is this the start of a new era of Turkish cen- tral bank policy — actually moving ahead of the market? Let’s hope so,” Nigel Rendell, a senior analyst for EMEA at Medley Global Advisors, was
quoted as saying by Bloomberg. “Positive impact on the lira is seen as the repo rate rises. How things develop on both the policy front and for the lira longer-term will depend on events after the June 24 elections and whether Erdogan gives the CBRT latitude to act independently.”
Monetary curve
Explaining its move, the CBRT’s monetary policy committee (MPC) said in a statement: “Despite the mild outlook for demand conditions, elevated levels of inflation and inflation expectations con- tinue to pose risks on the pricing behaviour.”
The MPC emphasised that further monetary tight- ening would be delivered if required. To convince the markets that despite the political pressure
it is going to stay ahead of the monetary curve,
it will need to make good on its word. A collapse back to somewhere near the all-time low lira vs the dollar rate of 4.9294 seen on May 23 would be a disaster and would demand even more extensive rate increases to regain control of the currency.
Ahead of the MPC meeting, analysts were divided over whether the regulator would move to tighten rates again, but nobody was forecasting some- thing of the magnitude of 125bp.
Market reaction to the rate increase was extremely positive at first glance. The TRY gained 1.75% d/d to trade at 4.4757 against the USD as of 15:30 lo- cal time (it had slipped to 4.4883 by 17:50) while the benchmark BIST-100 Turkish stock market index, which had been falling at a fast clip since last week, was up 1.82% to 98,414. Banking shares gained 3.4% — anxieties over the alarming descent of the TRY prior to the latest rates action led to consternation among economists that Turkey faced a currency-and-debt crisis that would leave lend- ers exposed to critical levels of problem loans.