Fragile Confidence Returns to Turkey as Markets Cheer Rate Hike

(Bloomberg) -- Turkey’s biggest interest-rate increase in more than two years is being hailed as the first step in restoring the central bank’s credibility, underpinning the nation’s currency, stocks and bonds.

The Monetary Policy Committee led by Governor Naci Agbal increased the one-week repo rate Thursday to 15% from 10.25%, as forecast by most analysts polled by Bloomberg. The central bank also said all funding will be provided through the main policy rate, restoring predictability to monetary policy.

The lira was little changed at 7.569 per dollar on Friday after strengthening as much as 2.5% following the decision.

Here’s a roundup of comments on what the rate decision means for Turkey’s markets:

Paul Greer, a money manager at Fidelity International in London:

• “The first MPC meeting of new CBRT Governor Agbal has been a success as far as international investors are concerned
• “The full orthodox simplification of the monetary-policy framework, by taking all funding to the one-week repo rate of 15%, is to be applauded, as well as the hawkish language around inflation
• Still, the central bank effectively tightened by only 20 basis points, with the weighted average cost of lira funding already at 14.8% before Thursday’s rate hike
• “The volatility around the event has been removed, which will support Turkish risk assets in the near term, particularly as the market has been positioned underweight Turkey for some time”

Cristian Maggio, head of emerging markets strategy at TD Securities in London:

• The CBRT has introduced “simplification by returning a benchmark role to the repo rate. This is clearly good
• “Lira can extend gains for a while, less perhaps than I would have expected, but with the proper external conditions it can do well for a little while
• “Confidence is a bit higher for Turkey now, but it remains a fragile confidence that will need to be reinforced with more and consistent action
• “If the CBRT thinks this is one and done, they will soon lose control of the lira again”

Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Standard Investments in London:

• “At least they did what the market expected of them. There was a risk that they disappointed after the rally in the lira over the past couple of weeks and the pricing out of rate hikes by the curve
• “Their work is not done yet. This was the first step in regaining credibility
• “The lira’s move that we’ve seen thus far has been mostly short-covering -- of which there was loads to cover. Indeed, it probably hasn’t been fully covered yet”

Gabriele Foa, a London-based money manager at Algebris U.K. Ltd.:

• “Given the high carry and the long-held underweight of investors, Turkish assets are likely to be supported further despite the recent strong move
• “Monetary policy is an important first step, but not all. A lower current-account deficit and credit growth and an attenuation of international tension are pre-conditions for a more sustained rally too”

Per Hammarlund, chief emerging-markets strategist at SEB AB in Stockholm:

• “The hike is an important step but unless President Erdogan gives up his view that high interest rates cause inflation and his attempts to control the CBRT’s monetary-policy decisions, investor confidence will only last so long”
• The lira will probably stabilize around 7.50-7.60 per dollar before starting to weaken gradually in the second half of 2021, when a vaccine is more readily available and President Erdogan would want lower rates to jump-start the economy

Julian Rimmer, a trader at Investec Bank Plc in London:

• “At last the CBRT has put itself, if not ahead of the curve, at least no longer some way behind it
• “Most of this perceived sudden volte face in monetary policy has been discounted by the move in the lira since Uysal’s dismissal, but equities could and should trade higher, spurred by extremely light positioning and a real pick-up in sentiment”

Ehsan Khoman, the head of Middle Eastern research at MUFG Bank in Dubai:

• “We take comfort with today’s return to orthodox monetary policies, which bolsters the central bank’s credibility and strengthens the achievement of price stability through enhanced transparency, predictability and overall macroeconomic simplification”
• MUFG’s terminal one-week repo rate forecast is 18%
• “A core risk going forward is that despite today’s credible return to conventional monetary policy, the central bank may misconceive that its new messaging will be sufficient to lure back entrenched investors”

Saed Abukarsh, chief investment officer at Ark Capital Management in Dubai:

• “It shows that that the central bank is serious about fighting inflation. This could bring the lira back into the emerging-market basket of trades that are favorable for carry
• The currency will probably trade between 7 and 7.85 against the dollar, for now, as it has largely priced in the rate hike

Trieu Pham, a strategist at ING Groep NV in London:

• “In credit, I have seen Turkey’s sovereign bonds performing very well over the last two weeks and eliminating all underperformance versus peers
• “There’s room for more optimism going forward as investors have regained some more confidence after today”

Morgan Stanley analysts including Georgi Deyanov and James Lord in London:

• The central bank has sent a “strong message” that it will keep policy tight to control inflation, adding that it will keep rates on hold this year and next though there could be a risk of further hikes if inflation surprises to the upside
• “We are open-minded about 2021, but for now we think that USD/TRY could reach 7.0 over the remaining weeks of the year”
• The Turkey sovereign or quasi-sovereigns may look to tap the overseas bond markets now to raise funds

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