Turkish lira
Mehmet Kalkan
Turkey’s Monetary Policy Committee decided on Thursday to keep its key interest rate unchanged at 19%, a measure much anticipated by markets.
While not surprising to investors watching the central bank, the bad signal runs the risk of volatility for the country’s currency, as it evokes the likelihood of higher rates in the future to curb double-digit inflation. Turkey.
“We believe that eliminating the bias against rising inflation expectations suggests that the TCMB (Turkish Central Bank) now has a weaker reaction function,” Goldman Sachs wrote in a note on Thursday, highlighting the fact that the bank crucially removed its bias toward hardening interest rates from its press release.
“So we see higher risks of premature rate cuts or relief from rising lending,” Goldman said, although the investment bank does not see the country as having a chance to lower rates. of interest until the fourth quarter of this year.
The Turkish lira has lost significant value in the last twelve months, with locals less able to pay for goods and more expensive imports as a result of what analysts describe as Turkish President Recep Tayyip Erdogan’s stubborn refusal to raise rates. as well as reducing an increasing current account deficit. Contrary to popular economic thinking, Erdogan believes that interest rates are “bad” and cause inflation, rather than the other way around.
The dollar has gained more than 8% against the updated lira. Inflation in Turkey is currently 15%.
The Turkish lira fell about 16% in one day on March 22 after Erdogan fired former central bank chief Naci Agbal, who had significantly raised interest rates during his less than five months of work – which most investors agreed was necessary to cool Turkey’s frothy inflation. .
Erdogan replaced him with Sahap Kavcioglu, now the fourth head of central banker in two years, who is believed to be more flexible to Ergodan’s demands and tendency to pull the policy towards monetary policy.
Timothy Ash, Bluebay Asset Management’s chief emerging market strategist, described the central bank’s latest move as “clearing the platform to cut at the first opportunity”.
“Inflation is rising, the current account is widening and reserves are falling,” he wrote in a note on Thursday. “How can you cut the CBRT without sacrificing the lira?”
Goldman Sachs sees inflation rising to 18% year-on-year in April and expects the country’s current account deficit to widen. “A premature reduction in rates under these conditions could lead to renewed volatility of the lira, which we believe will be the main constraint on the maturity of the TCMB,” the bank wrote.