Turkey Watchers Puzzled on Policy After Central Bank Chief's Q&A

(Bloomberg) -- Murat Cetinkaya set the Turkish lira wobbling on Tuesday with comments that a new round of monetary tightening may be possible. But even after the currency trimmed declines, market watchers were still left pondering whether they’d learned anything new about the nation’s policy path and foreign reserves.

Read more: Turkey’s Central Bank Says Another Tightening Cycle Is Possible

The lira was little changed at 5.9483 per dollar as of 12:45 p.m. in Istanbul, after losing as much as 0.6 percent earlier. The nation’s 10-year bond yields climbed 57 basis points to 19.95 percent, the highest since October.

Here’s how strategists and traders are digesting Cetinkaya’s remarks:

Credibility a Problem

Tatha Ghose, a senior emerging-market economist at Commerzbank AG, in London:

  • “We welcome their pledge on tightening but credibility will still be a problem as they have always hesitated in the past; that’s why market reaction is muted.”
  • “But it is good that they retracted that dovish shift, although only after facing pressure on the lira – hence, the market will be unsure whether this is a genuine change or just management of the situation.”
  • “CBRT should have raised the inflation forecast as they clearly foresee higher food and oil prices and the recently weaker lira will further boost inflation - these cannot already be in the forecast.”
  • “I did not find the statements today very realistic. ”

‘Overall Dovish’

Cristian Maggio, the London-based head of emerging-market strategy at TD Securities:

  • “It was overall dovish, relative to what the market needs, with the notable exception of that comment on potentially tightening rates in the future.”
  • “The real question is rather why did the MPC feel the urge to remove an explicit commitment to possibly doing so in the statement last week, to replace it with an ambiguous sentence? And then again, why reasserting that readiness today, after USDTRY briefly reached a level close to 5.99?”
  • “The explanation on net reserves was really short and unconvincing.”

‘Wishful Thinking’

Julian Rimmer, a trader at Investec Bank Plc in London:

  • “I don’t think this changes the market’s perception. The year-end inflation target, and the possibility of increasing reserves quickly, looks like so much wishful thinking. Far better to initiate a tightening cycle than to simply moot its possibility.”

Don’t Over-Analyze

Richard Segal, a senior emerging-markets analyst at Manulife Asset Management in London:

  • “It looks like they were taken aback by the negative reactions to 1) the reserve volatility and 2) the slight revision to the forward guidance.”
  • “The message is that Turkey is not a country of nuances and that not much fundamental has changed, and short-term reserve movements should not be over-analyzed.”
  • “I am also encouraged that the year-end CPI target is unchanged at 14.6 percent, even though food and energy are higher, because this implies the rebalancing is happening more quickly and core inflation may decline more quickly.”


Nigel Rendell, a London-based senior analyst at Medley Global Advisors:

  • “The Governor is doing his best to try and back-peddle. By removing the statement last week about further monetary tightening, the central bank undoubtedly spooked the markets.”
  • “How the lira behaves over the coming days will determine whether Cetinkaya has managed to claw back some credibility or done little more than close the stable door after the horse has bolted.”

Ringing ‘Hollow’

Jason Daw, Singapore-based head of emerging-markets strategy at Societe Generale SA:

  • “Suggesting the possibility of a tightening cycle in the inflation briefing rings a bit hollow. It still seems the CBRT is unwilling to take the necessary actions to combat structurally high inflation and, unless policy is reoriented, downside risks to the lira will prevail.”
  • Societe Generale cut its lira forecast last week to 6.50 per dollar for the year-end from prior estimate of 6.0.

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