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September 4, 2018

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Turkey’s central bank moves to calm market

Turkey’s central bank signaled yesterday it would take action against “significant risks” to price stability, a rare move to calm financial markets after inflation surged to its highest in nearly a decade and a half.

The comments, seen as presaging an interest rate increase at the bank’s next meeting on September 13, underscore the volatile outlook for prices amid a currency crisis. The lira has lost 40 percent of its value against the dollar this year, driving up the cost of goods from potatoes to petrol and sparking alarm about the impact on the wider economy.

Inflation jumped 17.9 percent annually in August, official data showed, outstripping market expectations and marking its highest level since late 2003.

“Recent developments regarding the inflation outlook indicate significant risks to price stability. The central bank will take the necessary actions to support price stability,” the bank said shortly after the release of the inflation data.

“(The) monetary stance will be adjusted at the September monetary policy committee meeting in view of the latest developments.”

For investors, the main question has been whether the central bank will be able to sufficiently hike rates to tame inflation. It left rates on hold at its last meeting in July, confounding expectations and sending the lira sharply weaker.

It last raised rates in June, when it lifted its key one-week repo rate by 1.25 percentage points, to 17.75 percent.

By signaling that it was ready to take action, the central bank may now have inadvertently set financial markets up for disappointment if it doesn’t deliver a hefty increase, said Piotr Matys, an emerging markets forex strategist at Rabobank.

“A proper rate hike is required and by making a pledge to raise interest rates, the central bank may have raised the bar for itself to exceed expectations on September 13,” Matys said.

“The central bank basically has no room to disappoint.”

The lira briefly recovered some losses immediately after the central bank’s announcement. By 1132 GMT it was 1 percent weaker on the day at 6.6100 to the dollar.

President Tayyip Erdogan, a self-described “enemy of interest rates”, wants to see lower borrowing costs to keep credit-fueled growth on track. Economists, who fear the economy is set for a hard landing, want big rate hikes.

Finance Minister Berat Albayrak said on Sunday that the bank was independent of the government and would take all necessary steps to combat inflation. He also promised a “full-fledged fight” against inflation.

The bank is likely to deliver an increase of 2 percentage points on September 13, far short of the 7-10 percentage points that investors would like to see, said Jason Tuvey of Capital Economics in a note to clients.

Such substantial increases are needed “to bring real interest rates back to positive territory and reassure the markets that policymakers are willing and able to tackle high inflation,” he said.

Inflation rose 2.3 percent from the previous month, above the 2.23 percent forecast in a Reuters poll, the data showed.


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