Lira Gazing Has Basci Push Back on Stimulus Calls: Turkey Credit
Gazing at the Turkish lira is prompting central bank Governor Erdem Basci to guide market expectations away from aggressive stimulus as he seeks to deter speculators from pushing the currency lower.
The lira trailed behind all eastern Europe, Mideast and African currencies in the past month as investors anticipate rate cuts starting as soon as Dec. 18. Basci said yesterday he won’t be taking “extreme” steps as “measured” reductions are sufficient. Two-year bond yields extended this year’s drop to 525 basis points, the most among 20 major emerging markets.
“Everyone’s grandmother knows” Basci will be cutting, Isik Okte, a strategist at state-run Turkiye Halk Bankasi AS (HALKB)’s investment unit in Istanbul, e-mailed yesterday. “He doesn’t want to give currency traders a reason to smell blood.”
Basci’s remarks signal resistance to calls from lawmakers including Economy Minister Zafer Caglayan to aggressively spur consumer demand. Basci said he’ll monitor the lira against Turkey’s main trading partners to decide on rates. His cut last year triggered the world’s biggest currency depreciation, with the lira plunging 18 percent against the dollar.
Speculation of the first cut to Turkey’s main lending rate since August 2011 has been building as economic growth slowed to 1.6 percent in the third quarter, a pace that was below the most pessimistic estimate in a Bloomberg survey of 12 economists. Growth was the most sluggish since a contraction in 2009, according to the figures released Dec. 10. Industrial production fell 5.7 percent in October, also the lowest level in more than three years.
Basci varies rates between his benchmark one-week lending rate of 5.75 percent, the so-called policy rate, and an upper end of the lending corridor of 9 percent. He can also adjust the overnight borrowing rate, currently at 5 percent.
The yield on the government’s benchmark two-year notes fell one basis point to 5.75 percent today, two basis points above a record low on Dec. 4. The yield has declined this year from the highest in emerging markets to below Russian and Brazilian debt.
The extra yield over U.S. Treasuries on Turkish bonds in dollars dropped two basis points to 178, according to JPMorgan Chase & Co.’s EMBI Global Index. That’s down from 385 at the end of last year and compares with 184 for Russia and an average of 4398 for Middle Eastern countries.
Five-year credit-default swaps on Turkey fell one basis point to 124. That compares with 134 for Russia and 144 for South Africa. Falling prices show improving perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The lira climbed 0.3 percent to 1.7788 per dollar today. The currency has advanced 1.3 percent during the past month, compared with 4.4 percent for the Polish zloty, 4.2 percent for Israel’s shekel and 3.5 percent for Russia’s ruble.
Goldman Sachs Group Inc. said in a Dec. 5 report that the lira will probably strengthen throughout December before plunging 8 percent to 1.90 per dollar within three months as interest rates fall.
Basci, speaking at a conference in the Mediterranean city of Antalya yesterday, said he’s keeping watch on the real effective exchange rate, or REER, against Turkey’s main trading partners. The REER was at 119.2 in November. The central bank will act to reverse lira gains should the measure strengthen to between 125 and 130, Basci said.
The central bank’s trigger has been eased since Nov. 9 when Basci said he would consider a reading of 120 to be “overvalued” and 125 or above would warrant a stronger policy response.
“The lira will inevitably surpass 120 in January,” Gulay Girgin, an economist at Oyak Securities in Istanbul, said in an e-mailed report yesterday. “We keep our expectation of a minor cut in the policy rate and lower band of the corridor at the monetary policy committee meeting on Dec. 18 before a bolder move in January.”
Caglayan said in a Dec. 10 speech in Ankara that the central bank has already waited too long and a rate cut has become “unavoidable.”
Even with Basci’s more cautious tone, traders betting on the outlook for the next 12 months sent one-year interest-rate swaps tumbling five basis points to 6.34 percent yesterday.
’’After listening to Basci, we sense that he won’t immediately deliver large cuts,’’ Ozgur Altug, chief economist for BGC Securities in Istanbul, said in e-mailed comments yesterday. “The bank will probably cut its policy rate and overnight borrowing rates by 25 basis points at the next meeting on Dec. 18, but it won’t make the strong move that many in the market were expecting after the disappointing growth figures.”
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