Turkey May Not Take Rate Path Touted by Goldman and JPMorgan

Turkey’s central bank is unlikely to tinker with its monetary policy framework, sidestepping an option that some of Wall Street’s biggest lenders said could form its response to the sliding lira.

Rather than lifting the upper bound of its rate corridor from 11.25%, the choices for the central bank at a meeting on Thursday would probably be to leave all borrowing costs on hold or opt for an outright hike of its benchmark -- which will push other funding rates higher as well.

Only three of 31 analysts surveyed by Bloomberg predict the key one-week repo rate will rise from 8.25%. Analysts at Goldman Sachs Group Inc., JPMorgan Chase & Co. and four other institutions forecast an increase in the late liquidity lending rate -- the central bank’s highest -- of between a quarter-percentage point to 100 basis points.

Although it’s technically possible, the central bank is unlikely to make changes to the current structure of the corridor, which consists of the overnight and late liquidity lending rates placed 150 and 300 basis points above the one-week repo rate, a person familiar with the matter said. The central bank declined to comment.

Turkey May Not Take Rate Path Touted by Goldman and JPMorgan

“Rates have to go higher and stay there for as long as needed,” said Cristian Maggio, the head of emerging-market research at TD Securities in London. “So the stealth tightening via the overnight lending and late-liquidity window rates is not suited for this purpose.”

The decision could prove decisive for the lira, after weeks of policy tightening by stealth did little to contain the currency’s weakness. Since ceasing to provide liquidity at its cheapest rate by suspending one-week repo auctions last month, the central bank’s approach has effectively been 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 was at 10.61% on Tuesday, rising from as low as 7.34% in mid-July. Turkey’s currency is the world’s worst performer against the dollar in the same period, extending its loss for the year to more than 22%.

The lira was little changed before the rate announcement after briefly gaining against the dollar earlier on Thursday. Most emerging-market currencies were down.

What Our Economists Say...

“Political pressure from the president, who wants lower rates, has forced the central bank to tighten by stealth. With the repo window shut, the effective policy rate is likely to continue rising.”

-- Ziad Daoud

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Until June, the central bank delivered 1,575 basis points of easing in nine consecutive steps, leaving Turkey’s inflation-adjusted borrowing costs among the lowest in the world. Governor Murat Uysal has kept the benchmark rate on hold since then, avoiding a change that could irk President Recep Tayyip Erdogan.

Under Uysal’s predecessor in 2018, the central bank shifted its focus to a single benchmark rate, a move lauded at the time as a “simplification” of Turkey’s monetary regime, and a step toward making policy more predictable.

The return of a less transparent approach brought back uncertainty just as investors demanded higher rates to hold Turkish assets. Even a relatively small rate increase on Thursday may have a strong impact on the lira, said Piotr Matys, a London-based strategist at Rabobank.

“The upcoming meeting would be a perfect moment to raise interest rates,” he said.

©2020 Bloomberg L.P.

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