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Southeast Europe
April 27, 2018 www.intellinews.com I Page 14
Turkey’s rate setters positively surprise market with 75bp hike
Will Conroy in Prague
Turkey’s central bank on April 25 exceeded market expectations by raising its highest interest rate by 75 basis points (bp).
With investors having dumped the Turkish lira (TRY) in recent weeks, the monetary policy committee (MPC) moved to raise the late liquidity window rate to 13.50%, but left the benchmark repo rate at 8%, the overnight lending rate at 9.25% and the overnight borrowing rate at 7.25%.
“Current elevated levels of inflation and inflation expectations continue to pose risks on the pricing behaviour. Upside movements in import prices have increased such risks,” the Central Bank of the Republic of Turkey (CBRT) said in a statement. “Accordingly, the committee decided to implement a measured monetary tightening to support price stability.”
Prior to the MPC meeting the market consensus was for a 50bp increase in the top rate, with ana- lysts concluding that a hike would help reduce the chances of the stressed Turkish economy experi- encing a hard landing ahead of the June 24 snap presidential and parliamentary elections called by President Recep Tayyip Erdogan last week.
Erdogan regularly makes statements going against conventional monetary wisdom – Turkish markets have been crying out for a substantial interest rate cut for an extended time, but the outspoken president has persisted in calling for cheaper money, even claiming that such a move would send Turkey’s sticky double-digit inflation
Turkey will soon be unmistakably heading into another election season and, if it steadies the lira, the rate hike could make the difference to many voters.
down given the particulars of the country’s emerging economy – but he will perhaps take the tightening in his stride if it firms the embattled TRY and financial markets ahead of voting.
Assessing the hike introduced by the CBRT, Nicho- las Spiro, a partner at Lauressa Advisory in London, was quoted by Reuters as saying: “Today’s rate hike is a step in the right direction and shows Erdogan’s decision to call a snap election has placed a heavy premium on the stabilisation of the wilting lira.”
He added: “Yet the fact remains that it will take a sharper and sustained tightening in monetary policy to rein in inflation and restore confidence in the lira. The central bank’s credibility is still badly damaged.”
Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, remarked in a note: “The CBRT does the right thing, and actually positively surprises the market by hiking the LLW by 75bp. The consensus was 50bp, but the market was primed for a sell-off if the CBRT had failed to hike.”
He added: “I think this rate hike, remember in the heat of an election campaign, is a reflection of the difficult challenges now being faced on the economy front with concerns of overheating—a widening current account deficit and double digit and sticky inflation.”
Nevertheless, Ash noted that if anything the rate increase was more about anchoring the exchange rate this side of the elections “rather than show-