Rate Increase Stamped Betrayal Keeps Lira Exposed: Turkey CreditBenjamin Harvey
Arresting the lira’s freefall would require Turkey’s central bank to do something that Prime Minister Recep Tayyip Erdogan says would amount to surrendering to those trying to overthrow him: raise interest rates.
The central bank will keep its three main rates unchanged at next week’s meeting, according to surveys of economists by Bloomberg. The lira is the world’s worst-performing currency over the past month, tumbling to a record today. The decline has been accelerated by prospects for reductions in U.S. monetary stimulus and a Turkish corruption probe that Erdogan calls a coup attempt. Two-year yields rose the most among 18 emerging markets tracked by Bloomberg since the crisis erupted on Dec. 17.
Erdogan, who has dominated Turkish politics since his party came to power in 2002, has vowed to defeat those behind the investigation, saying it’s backed by international financiers seeking to weaken Turkey by forcing borrowing costs higher. Finance Minister Mehmet Simsek said Jan. 15 that Turkey isn’t obligated to make its monetary policy, which has relied on liquidity instruments rather than interest rates, more orthodox just because others want it that way.
“A formal, plain vanilla interest rate rise is not on the cards,” Tim Ash, an economist at Standard Bank Group Ltd. in London, said in e-mailed comments yesterday. “We may see some more ‘smoke and mirrors’ efforts to prop up the currency, but I still don’t think that this will be effective now without a more formal and convincing rate increase. The selling pressures on the lira are just too overpowering at present.”
The lira fell as much as 0.7 percent to a record 2.230 per dollar by 5:15 p.m. in Istanbul today after weakening past 2.2 for the first time yesterday. The currency has depreciated 8.7 percent since the corruption probe became public and is down 21 percent in the past year.
“The issue is not corruption but the Turkish economy, interest rates and our foreign policy,” Erdogan said in Ankara on Dec. 25. Those behind the probe “are trying to deal a heavy blow against the economy, they’re working to raise interest rates and doing everything possible to make international investors anxious,” he said on Jan. 15.
The investigation has cost four cabinet ministers their jobs. It also led to the arrests of two ministers’ sons, government officials and the chief executive of state-run lender Turkiye Halk Bankasi AS. Charges range from rigging government tenders to bribery, fraud and gold smuggling.
At the central bank’s policy meeting last month, Governor Erdem Basci maintained the one-week repurchase rate at 4.5 percent and held the upper and lower bands of his rates corridor at 7.75 percent and 3.5 percent, respectively. Basci vowed in August to keep interest rates unchanged through the end of last year to support the economy.
Erkin Isik, a strategist at Turk Ekonomi Bankasi AS, who is bucking consensus by predicting a 50 basis-point rate increase next week in the upper band, says even that “will unlikely be enough to contain the depreciation pressure on the lira.” The bank will probably be forced to act to contain inflation, while a deterioration in consumer confidence will prevent it from tightening more aggressively, he said by e-mail yesterday.
Inflation unexpectedly accelerated to 7.4 percent in December from 7.32 percent a month earlier, the state statistics office said on Jan. 3. Analysts in a Bloomberg survey predicted it would slow to 7.26 percent.
“The market is waiting for action,” Inanc Sozer, an economist at Odea Bank AS in Istanbul, said by phone yesterday. While the central bank will keep rates unchanged next week, it needs to further tighten liquidity and “give the message that it will be tightened more,” Sozer said.
The lira will probably fall another 3.9 percent to 2.3 per dollar before the central bank acts, according to Henrik Gullberg, a London-based currency strategist at Deutsche Bank AG. The increase required to generate any meaningful appreciation in the lira would be “200 basis points or more” in the upper band, he said by e-mail yesterday.
The currency’s depreciation may accelerate if the central bank doesn’t raise rates next week, Fatih Keresteci, a strategist at HSBC Holdings Plc, said in an e-mailed report yesterday. The lira will probably weaken to 2.5 per dollar in 12 months even if the central bank does raise rates, which is “ultimately inevitable,” according to a report by Goldman Sachs Group Inc. on Jan. 4.
The two-year note yield rose nine basis points to 10.04 percent yesterday, and is up 112 basis points, or 1.12 percentage points, in the past month. It touched a record low of 4.79 percent on May 17, five days before the Federal Reserve signaled it could scale back stimulus.
In December, the Fed said it would cut monthly bond purchases to $75 billion from $85 billion. U.S. policy makers will keep trimming stimulus by $10 billion at each meeting before ending the program in December, a Bloomberg poll of economists on Jan. 10 showed. The next Fed meeting is scheduled for Jan. 28-29.
“A withdrawal of U.S. monetary stimulus and the political instability engendered by the corruption probe are weighing heavily on Turkey’s currency,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail yesterday. “The credibility of Turkey’s central bank, which stubbornly refuses to mount a proper interest-rate defense of the lira, is being undermined with each passing day.”