Barclays Says Lira Still Below Level That Would Prompt Rate Hike

(Bloomberg) --

Turkey’s currency “is close to but still below the levels” at which the central bank would “consider a front-loaded hike,” Barclays Plc economists including Ercan Erguzel said in a report to clients.

The lira depreciated to record lows in recent days before recovering slightly after regulators announced measures to arrest its decline. The steps included a suspension of the central bank’s one-week repo-rate auctions and preparations to rein in credit growth.

• Unless the dollar-lira pair exceeds 7.50, Barclays expects Turkey’s central bank to “keep its policy rates stable and manage the volatility by moving within the corridor and reducing TRY liquidity in the system”
• Barclays sticks with its call for Turkey’s policy rate to remain on hold at 8.25% for the rest of the year; “however, the risks are clearly to the upside following the recent volatility” in the lira
• The main factors behind the lira’s volatility are local demand for hard currency and a “relatively muted reaction” from the central bank in terms of foreign-exchange sales
• Even if the central bank shifts to using the Late Liquidity Window to fund all lending at 11.25%, Barclays says it “may not be sufficient enough to limit locals’ FX demand, ceteris paribus”
• Policy makers will likely raise the blended funding rates toward 11.25% while evaluating the effect of their measures over the next few days; the central bank is set to continue to “intervene verbally if needed” until the next meeting of the Monetary Policy Committee on Aug. 20
• NOTE: Turkey’s Policy Shift Ends Turbulent Week for Its Currency
• NOTE: Turkey’s Perilous Game With Markets Reaches a Crossroads

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