Economists Who Predict Rate Hold Say Turkey Should Actually Hike
Economists predict that Turkey’s central bank will hold interest rates this week even as most say a hike is needed.
(Bloomberg) -- Economists predict that Turkey’s central bank will hold interest rates this week even as most say a hike is needed.
Most respondents in a survey of 22 analysts say the central bank will leave its benchmark one-week repo interest rate unchanged at 8.25% on Thursday. Only four predict a hike of 75 to 175 basis points.
But when reached by Bloomberg about their estimates, 13 of the 18 forecasters who see a hold acknowledged the central bank should raise rates instead, with suggestions ranging from an increase of 150 to 300 basis points.
The discrepancy is so stark because of the central bank’s track-record in the face of President Recep Tayyip Erdogan’s calls for lower borrowing costs, a view he repeated this month even after the lira weakened to a record low against the dollar.
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“What should the central bank do? The economics is clear. A rate hike is needed because inflation is well above target, real interest rates are among the lowest in emerging markets and the currency has weakened significantly. What will the central bank likely do instead? Politics may dictate keeping the one-week repo rate on hold.” Click here to view the piece. |
Policy makers led by Governor Murat Uysal haven’t stood pat despite their reluctance to resort to an outright rate hike. The central bank has been tightening liquidity using fringe tools and ceased to provide funding at its cheapest rate of 8.25%.
It also opened conventional repo auctions in which lenders set their own rates through bids, and limited the amount of money lenders can borrow in the interbank market, a move that may send some of them to seek funding at the regulator’s highest rate.
The central bank’s approach is now effectively to tweak the cost of funding on a daily basis, modifying the amount of liquidity available to lenders across its various rates. The average cost of cash provided by the central bank rose to 9.31% on Tuesday as a result, compared with as low as 7.34% in July.
Uysal’s preferred path will likely be to continue tightening by stealth and avoiding a change in the benchmark that could irk Erdogan. The Turkish leader is a firm believer that high rates cause inflation. Most economists and central banks around the world believe the opposite to be true.
The monetary authority still has space for additional liquidity steps and could direct banks to borrow from its late liquidity window at 11.25%, according to Ibrahim Aksoy, chief economist and strategist of HSBC Asset Management Turkey, who predicts no rate change on Thursday.
Investors say the problem is that such an approach lacks transparency. What looks like tightening today can be reversed tomorrow with little notice or explanation.
It additionally amounts to a reversal of a decision under former Governor Murat Cetinkaya to focus on a single benchmark from June 2018 after a bout of lira depreciation resulted in a massive rate hike.
The central bank’s fiddling with its policies also evokes similar delaying tactics it used two years ago.
It resisted raising the key rate after the lira lost about a quarter of its value in August 2018 and was eventually forced into a steep outright increase the following month. But by then inflation had already skyrocketed, forcing it to keep the benchmark above 20% for months.
Turkey’s central bank “will likely attempt more backdoor tightening before eventually being forced to hike rates outright later this year,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
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