Turkey set to raise rates, balancing its currency and growth concerns

ISTANBUL: The Turkish Central Bank is expected to raise interest rates on Thursday to calm a currency crisis, but forecasts for the scale of the increase vary widely as the bank balances concerns over lira weakness with worries about an economic slowdown.

The lira has slumped 40 per cent against the dollar this year, weakened by unease over President Tayyip Erdogan’s influence on monetary policy and more recently a bitter row with the United States that has unsettled investors.

The central bank confounded expectations for a rate increase at its July meeting, fuelling the belief it is under pressure from Erdogan, who has called interest rates the “mother and father of all evil” and frequently urges they be kept low.

But after inflation surged in August to its highest in nearly 15 years, the central bank that it would take action against “significant risks” to price stability - a rare move to soothe financial markets.

It said its monetary stance will be adjusted at Thursday’s policy committee meeting. Analysts saw this as pointing to an increase in the benchmark one-week repo rate, now 17.75 per cent - less than the annual inflation rate of 17.9 per cent. Phoenix Kalen, strategist at Societe Generale, forecast the repo rate would be raised to 20.75 per cent and would be restored as the main policy instrument, after a period during which the effective funding rate has been 19.25 per cent.

“Although this amount of monetary tightening may disappoint market expectations and spark renewed TRY weakness, the decision would reflect the prioritisation of Turkish authorities’ concerns regarding a rapidly decelerating economy,” Kalen said.

Turkey’s economic growth slowed to 5.2 per cent in the second quarter, data showed this week, and the economy is expected to slow again in the second half.

In a Reuters poll, all 11 economists predicted the benchmark one-week repo rate would be raised. The average forecast was to 22 per cent, but predictions ranged from an increase of 225 basis points to 725 basis points.

“The central bank has a complete lack of credibility,” said Guillaume Tresca, senior EM strategist at Credit Agricole, commenting on why the range was so wide. “We know they are not independent and that is it. So, you cannot predict what they will do, what you are trying to do is to predict what President Erdogan will do,” he said. Muhammet Mercan, ING’s chief economist for Turkey, said authorities need to act with credible measures to restore confidence given the economy’s large forex debt service requirement.

He forecast the one-week repo rate would be raised to 21 per cent because of the weakening lira and deteriorating inflation outlook.

Morgan Stanley economist Ercan Erguzel highlighted financial stability concerns and said he expected the central bank to tighten the repo rate by 425 basis points to 22.0 per cent. “On the financial stability front, the biggest risk is the corporate sector’s short FX position and its indirect impact on the banking system’s asset quality,” he said. That is likely to have an impact on syndication rollover ratios, with September and October appearing from the monthly repayment schedule to be two critical months for rollovers, he added.

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