Mubasher: The Turkish Central Bank (CBRT) is set to raise interest rates at its policy committee meeting on Thursday in a bid to mitigate the currency crisis.
However, forecasts over the amount of interest rate hike vary widely as the central bank attempts to strike a balance between concerns over the Turkish lira weakness and economic slowdown jitters.
The lira already plunged 40% against the US dollar so far this year after the unease over President Recep Tayyip Erdogan’s influence on the monetary policy and recently the tension with the US sent a shudder of fear among investors.
The CBRT confounded expectations for a rate hike at its July meeting, adding to the belief that it is under the pressure from Erdogan, who considered the interest rates as “the mother and father of all evil.”
However, as the inflation soared last August to nearly 15-year peak, the central bank said that its monetary stance would be adjusted, and it would take action against “significant risks.”
Some analysts received this as a hint to raise the benchmark one-week repo rate, which stands now at 17.75%, less than the annual inflation of 17.9%.
The repo rate is set to be raised to 20.75%, and it would be restored as the key policy instrument, after a period during which the effective funding rate has been 19.25%, Societe Generale strategist Phoenix Kalen told Thomson Reuters.
Despite the amount of monetary tightening might come as a disappointment to the market, “the decision would reflect the prioritisation of Turkish authorities’ concerns regarding a rapidly decelerating economy,” Kalen said.
The central bank would increase the one-week repo rate to 21% on the back of weakening currency and detroirating inflation outlook, ING’s chief economist for Turkey Muhammet Mercan predicted.
The Turkish policymakers also need to act with credible measures to win back confidence following the economy’s huge foreign exchange (FX) debt service requirement, Mercan added.
The average benchmark rate expectation was that it would reach 22%, according to economists polled by Reuters, but the projected increase ranged from 225 basis points (bps) to 725 bps.
The central bank would tighten the repo rate by 425 bps to 22%, Morgan Stanley economist Ercan Erguzel told the news agency, highlighting concerns over financial stability.
“The biggest risk is the corporate sector’s short FX position and its indirect impact on the banking system’s asset quality,” Erguzel said.
Some others were cynical about the benefits of raising interest rates.
“It’s all about confidence,” veteran emerging-markets investor Mark Mobius told Reuters, adding that “OK, they raised interest rates, but what happens? People then say ‘you’re not confident. You’re not confident in your own currency therefore you’re offering us some crazy interest rates’.”