No End in Sight to Lira Woes for Nomura If Rates on Hold
(Bloomberg) -- For lira bears, a decision by Turkey’s central bank to hold rates unchanged on Thursday is just not going to cut it.
A Bloomberg survey of economists expects policy makers led by Governor Murat Cetinkaya to leave rates on hold for a fourth time. In that case, expect the lira to keep weakening, say Nomura International Plc and UniCredit SpA.
Clobbered by a diplomatic spat with the U.S., the lira has slipped 10 percent to a record low against a basket of euros and dollars since policy makers last met in September. With consumer-price increases in double-digits, inflation expectations showing no signs of easing and policy makers in Europe and the U.S. moving toward tighter policy, calls for Turkish rate rises in some corners of the market are growing.
“Allowing substantial depreciation in the lira is reckless policy and goes against the central bank’s supposed mandate to maintain price stability,” said Henrik Gullberg, a strategist at Nomura in London. He recommends investors go long an equally weighted basket of euros and dollars against the lira, expecting the Turkish currency to weaken as much as 9 percent to 4.50 over the coming months as the central bank remains on hold.
The fiscal stimulus designed to support growth this year has widened the country’s current-account deficit, leaving the lira captive to shifts in foreign investor sentiment just as accelerating consumer prices erode the currency’s real yield. Inflation quickened in September to an annual 11.20 percent, compared to an average cost of central bank funding of 12 percent.
While the central bank expects the inflation outlook to improve “gradually,” starting in the final months of the year, this is unlikely to provide much relief if policy makers hold pat and inflation accelerates again in October, according to Kiran Kowshik, a strategist at UniCredit.
“All else being equal, one should expect inflation expectations to stay elevated and for the ‘real’ average funding rate to decline further,” said Kowshik, who has a short lira-ruble recommendation. “We would expect the lira to face increasing downside pressure.”
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