All eyes on Turkey’s central bank as key decision looms

Turkey’s central bank is broadly expected to lift a key interest rate on Wednesday with policymakers balancing rapid inflation and a tumble in the lira against President Erdogan’s preference for strong economic growth. Roughly three-quarters of the 13 economists polled by Reuters expect Turkey’s central bank to raise its late liquidity window rate for the first time since it was boosted to 12.75 per cent in December 2017. The distribution of forecasts, however, highlights the uncertainty over what action central bankers will take. Among those who expect a hike, expectations range from 25 basis points (0.25 percentage points) up to 75 bps. One economist who was not included in the survey has called for a 100 bps increase. Turkey’s other main policy rates — overnight interest rates and one-week repo rate — are broadly expected to remain on hold. Turkey’s rate decision will garner intense interest across global trading desks, especially among investors making bets on the country’s currency. The lira has tumbled 7.3 per cent this year against the dollar and 9 per cent against the euro.

Recep Tayyip Erdogan’s decision last week to call elections in June, more than a year before they were previously scheduled, has helped calm markets and also bolstered expectations among some economists that the central bank will act before polling day this summer. “The government probably will want stable financial markets and a stronger lira going into the elections — especially given the importance of the lira for local sentiment,” said analysts at JPMorgan. Piotr Matys, emerging market currencies strategist at Rabobank, echoed that view. “President Erdogan’s announcement that Turkey will hold early presidential and general elections in June provided policymakers with more room for manoeuvre,” he said. Mr Matys, who is not included in the Reuters poll, said he expects a 100 bps increase, and warned that anything less “may not prove sufficient to improve sentiment towards the lira in a sustainable way.” Monetary policymakers have a difficult task ahead. Economists have warned that a currency depreciation spiral could be taking hold. Inflation is running at around 10 per cent a year, double the central bank’s target, while the lira has weakened to its lowest level on record. The two factors may amplify each other, economists have warned, with a falling lira boosting inflation, and inflation weakening the lira.



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