Busy week for the central banks

It wasn’t always like this. I mean central banks still have a crucial role to play in market economies but after the Great Recession of 2008, they have had to carry the heavy burden of market ruler, market maker and fire department for global financial markets. The last ten years have proven to be remarkable in terms of the actions central bankers have taken. (As a footnote for avid readers, I recommend The Lords of Finance: The Bankers Who Broke The World (2009) by Liaquat Ahmet, a definitive book on central banks/bankers).

This week, we’ll see central bank policy meetings for the Bank of England (BoE), the European Central Bank (ECB) and the Central Bank of Turkey (CBRT). The first two will fill their agendas with the exit of the asset purchase program to foreseeable effects of Brexit. The BoE is expected to keep the bank rate unchanged at 0.75 percent, says Investec, which looks for unanimously supporting votes on the bank rate and QE decisions. At the ECB’s meeting, the staff forecasts, as well as potential information on the ECB’s reinvestment policy, might get the most attention. The ECB has already flagged its plan to reduce monthly net asset purchases to 15 billion euros starting October from 30 billion euros per month currently, subject to incoming data, and to end net asset purchases at the end of the year. ECB President Mario Draghi could shed some more light on the ECB’s reinvestment policy of the bank.

The CBRT is set to lift policy rates in an attempt to stem the recent sharp falls in the lira, with the size of the increase being the critical question. Economists from Raiffeisen look for an interest rate rise in the range for 200 to 350 basis points, assigning a 70 percent probability for an increase within this range. However, Raiffeisen analysts say an increase of this magnitude might not be enough to calm down investors. “Most likely even such a move could not convince markets that the Turkish Central Bank is getting ahead of the curve in light of the overall challenging emerging market sentiment,” the bank’s analysts say. Furthermore, J.P. Morgan economists argue that CBRT will have to raise interest rates by 500 basis points to regain its credibility. “The lira collapse and its fallout on growth and inflation have pushed the policy rate markedly behind the curve,” JPM economists said. JPM’s estimation methodology suggest that the CBRT will raise the policy rate by 500 basis points either in September or in two instalments over September-October.