Unfazed by Subzero Real Rates, Turkey Wants Competitive Lira
Unfazed by Subzero Real Rates, Turkey Wants Competitive Lira
(Bloomberg) -- Four days after Turkey’s official borrowing costs fell below zero when adjusted for inflation, Treasury and Finance Minister Berat Albayrak said it’s the nominal interest rate that “matters more” and suggested the country’s currency should be at a more favorable level.
Turkey needs a “more competitive” lira, Bloomberg HT cited Albayrak as saying at a news conference in Istanbul on Monday. “The negative real rate is not new in Turkey. What matters more is the nominal rate.”
The central bank’s fifth straight round of easing under Governor Murat Uysal pushed its real rate below zero, only months after Turkey boasted one of the highest inflation-adjusted yields in the world. At the same time, the lira has held up well, notching up the emerging world’s sixth-best performance against the dollar so far this year.
Read more: Real Rates Vanishing in Emerging Markets as Inflation Bites
Turkey’s currency slipped after Albayrak’s comments and depreciated 0.5% against the dollar on Monday. It traded 0.3% weaker as of 10:19 a.m. in Istanbul on Tuesday.
It’s a “very dovish commentary from Albayrak” and “suggests lower rates and a more ‘competitive’ lira going forward,” said Timothy Ash, a strategist at BlueBay Asset Management in London.
The central bank’s latest move brought the benchmark rate to 11.25%, the smallest decrease since it embarked on an easing cycle last year. President Recep Tayyip Erdogan, who’s repeatedly said that rates will fall into single digits this year, believes higher borrowing costs cause rather than prevent inflation. Most economists and central banks around the world believe the opposite to be true.
The government, which increased its target for growth to 5% for 2020-2022, after slashing last year’s forecast to near zero, is relying on cheaper credit to give the economy an extra kick. Its success will hinge on the strength of the private sector, investment and exports.
Read more: Turkey Calling for Competitive Lira Suggests More Easing
Here are some highlights from Albayrak’s speech:
- The minister criticized private banks’ profit-oriented approach, saying they should support the real sector like state banks and keep up with the changing environment
- Albayrak said Turkey will no longer go back to its old habit of powering economic growth with bank loans
- No early election on the Turkish government’s agenda
- Turkey will increase the number of lira-based financial products, he said
- Turkey’s financial security issue became an issue of national security
- There is a delayed demand for consumer loans; “it’s time for some fine-tuning”
With the economy only starting to heal after the lira’s crash in 2018 tipped it into a brief recession, a weaker currency would make Turkey’s products more competitive abroad.
Turkish inflation capped last year at 11.8% as the lira weakened 11.1% against the dollar. That amounts to a real appreciation of the currency, a headwind for the nation’s exporters.
JPMorgan Chase & Co. said it expects Turkey’s policy rate to fall below 10% as early as July and reach 9% at the end of 2020. “If growth disappoints and/or geopolitical risks subside in a sustained way, the central bank could deliver more,” JPMorgan analysts including Yarkin Cebeci said in a report.
“Conversely, and perhaps more probably, a sharp worsening in external balances that could follow a powerful recovery in domestic demand and increased geopolitical vulnerabilities could start pressuring the lira and hence prompt Turkey’s central bank to be more cautious,” they said.
Even as Uysal forged ahead with monetary easing, he pledged to preserve “a reasonable rate of real return” for investors. The lack of a buffer against market sell-offs could now present a threat for Turkey.
Negative real interest rates also expose Turkish banks to occasional “risk-off” episodes, in which the premium no longer compensates for the multiple risks of investing in Turkey and its banks, according to Moody’s Investors Service.
“The negative rate makes lending to banks and investing in Turkish lira less attractive than in other emerging markets with positive real interest rates and will likely negatively affect central bank credibility,” Moody’s said in its Credit Outlook report on Monday.
--With assistance from Constantine Courcoulas.
To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net
To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, Paul Abelsky, Alex Nicholson
©2020 Bloomberg L.P.