Turkey Set to Hike Again After Lira Crash: Decision Day Guide
Turkey Set to Hike Again After Lira Crash: Decision Day Guide
(Bloomberg) -- Turkey’s central bank is expected to lift interest rates for a second month, continuing a tightening cycle that’s provided some support to one of the world’s worst-performing major currencies.
All but two respondents in a Bloomberg survey of 27 analysts expect the Monetary Policy Committee to raise its benchmark one-week repo rate Thursday. The median forecast is for an increase of 175 basis points to 12%.
That would bring the policy rate in line with the average cost of cash the bank already provides to commercial lenders. Governor Murat Uysal surprised investors last month with a 200-basis-point increase and has since tightened policy further by restricting funding at the benchmark rate, forcing banks to borrow using costlier options.
But he hasn’t arrested the currency’s fall: the lira dropped another 2% against the dollar since the September rates decision, a period in which most major world currencies gained. That brings its depreciation in 2020 to almost 25%.
| What Our Economists Say... |
|---|
“The question isn’t whether the CBRT will tighten policy -- it already has -- but whether it’ll formalize it by lifting the repo rate. At 10.25%, the repo rate now lags the average cost of funding from the central bank. When the CBRT faced a similar divergence in September, it opted to hike the repo rate. It could do the same this month.”
Click here to view the piece. |
Subtle Signs
For Barclays analysts including Ercan Erguzel, the bank’s increase on Oct. 9 to the cost of currency swaps with local lenders, to 11.75%, was a strong indicator that it may opt for a 150 basis-points increase in its policy rate.
Using backdoor channels at its disposal, the central bank has raised the weighted average cost of funds to 12.52% on Wednesday from as low as 7.34% three months earlier. The tightening follows a yearlong easing cycle that helped the government provide support to the $700 billion economy during the pandemic.
To break the spiral of a weak currency feeding into higher-than-targeted inflation, the central bank may have to outdo the September hike, according to Phoenix Kalen, an emerging-market strategist at Societe Generale SA in London.
“If the central bank wishes to short-circuit the current cycle of lira depreciation, then an explicit hike in the benchmark repo rate of 300-400 basis points should be considered,” said Kalen, who predicts a 200 basis-points increase.
©2020 Bloomberg L.P.