With the U.S. Federal Reserve leaving rates unchanged last week, Turkey’s central bank wasn’t able to take more bold action – but a rate hike in Turkey by year-end is likely and more hikes are needed over six months, writes Capital Economics emerging market Economist William Jackson. That matches the level of the previous base rate, the two-week deposit facility, and is in line with the forecast of all 21 economists in a Bloomberg survey.
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Piotr Matys at Rabobank predict a rate increase is needed to shore up the currency, the central bank said on Tuesday it “decided to maintain a tight liquidity stance” given “uncertainty” in markets on inflation expectations.
“In the Councilʼs assessment, the medium-term achievement of the Bankʼs inflation target and a corresponding support to the real economy point in the direction of maintaining loose monetary conditions for an extended period”, Hungarian news agency MTI quoted the statement released after the meeting.
The lira is weakening further today, at 3.03 to the US dollar. Benchmark two-year bond yields were at 11.24%, having already weakened from 11.17% since Monday, while the main BIST-100 Stock Index more than doubled its losses to as much as 1.3% for the day.
Annual inflation was zero in August and the forint was stable against the euro despite the threat of a slowdown in China, so the bank can afford to keep rates at a record low. Overall, it is fairly unlikely that CBT will start hiking rates at the September MPC combined with the Fed delaying normalization of its monetary policy.
“The cycle has turned, the currency is collapsing, and the central bank can just soften the blow”, said Wouter Sturkenboom, investment strategist at Russell Investments in London, which oversees around $265 billion in assets.
Consumer inflation tomorrow is forecast to moderate to 4.7 percent in August from 5 percent in July, as the price of petrol dropped by 51c per litre on the back of the fall in the oil price.
What move will the South African Reserve Bank make this week regarding interest rates? The reactive stance (or higher tolerance) of Turkey’s central bank against TRY depreciation suggests risks of delay/interruption to the simplification, particularly given the unknowns at home.
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Ali Babacan was announced as a parliamentary candidate in the election, along with Interim Finance Minister Mehmet Ali Simsek.
