Lira Patience Wears Thin as Higher Rates Demanded: Turkey Credit

Pressure is building on Turkish central bank Governor Erdem Basci to raise interest rates or face the prospect of the lira plunging to fresh records and government bonds extending their declines.

“Words are no longer enough, the market wants to see the central bank hiking rates,” Turker Hamzaoglu, chief emerging-markets economist at Bank of America Corp. in London, said by e-mail yesterday. “The more delayed it is, the more the central bank needs to deliver.”

It took yesterday’s announcement of an extraordinary central bank meeting with a decision promised for midnight tonight in Ankara to halt the lira’s 10-day slide, the longest run since 2001. Basci has shunned raising rates as Prime Minister Recep Tayyip Erdogan faces a corruption probe against his government and local elections on March 30.

Basci said at a press conference today that he’d called today’s emergency meeting to address excessive volatility in the currency and it was time to bring interest rates into the fold. At the same time, he distinguished between temporary and permanent rate increases and defended his flexible rates policy. Basci also raised the bank’s year-end inflation estimate to 6.6 percent from 5.3 percent and said the bank would issue a statement at midnight, allowing time for monetary policy committee member Abdullah Yavas to attend upon returning from the U.S.

“A conventional lending rate hike is very much on the cards tonight,” Abbas Ameli-Renani, an emerging markets strategist at Royal Bank of Scotland Plc., who attended Basci’s press conference in Ankara today, said by e-mail. “But I think a lot of market participants’ hopes that the central bank moves away from unorthodox policy tonight are overdone.”

Yields Fall

The yield on two-year notes rose 12 basis points to 11.06 percent at 5:00 p.m. in Istanbul. That’s up from a record low of 4.79 percent on May 17, five days before the Federal Reserve signaled it could start scaling back bond purchases. The Fed will probably cut another $10 billion from its $75 billion monthly bond-buying program at a two-day meeting that starts today, according to a Bloomberg survey of economists this month.

Basci kept his three main interest rates unchanged at his last policy meeting on Jan. 21, opting instead to introduce a fourth rate of 9 percent to be used only on so-called “extra tightening days.” The lira’s slide persisted even after the central bank made its first unscheduled intervention in the foreign-exchange market in more than two years on Jan. 23, estimated at a record $3 billion by HSBC Holdings Plc.

Higher Rates

Turkey needs to raise the upper rate, called the overnight lending rate, by at least 300 basis points, or 3 percentage points, according to Tim Ash, chief emerging-markets economist at Standard Bank Group Ltd. in London. The rate is currently at 7.75 percent.

“The assumption is that they have to hike policy rates, and very significantly,” Ash said by e-mail yesterday. “If they don’t, their credibility will be shot through and the lira will go below 2.5 against the dollar.”

Basci has kept rates low as the economy struggles to recover from the slowest growth since the recession in 2009. Erdogan has vowed to defeat those behind the government probe, saying it’s backed by international financiers seeking to weaken Turkey by forcing borrowing costs higher.

The lira strengthened 2.3 percent yesterday, after earlier declining more than 2 percent and falling to all-time lows in eight of the past 11 days. The currency rose 0.9 percent to 2.2635 per dollar today, trimming this year’s drop to 5.1 percent. That’s the biggest decrease after Argentina’s peso, which slumped 15 percent last week after authorities withdrew support for the peso and announced plans to ease some currency controls.

Behind Curve

The size of the rate increase will need to be large to stem the turmoil, according to Julian Rimmer, a broker at CF Global Traders in London.

“Anything less than 250 basis points and the central bank is still behind the curve,” he said. “There is room for disappointment Wednesday if the central bank doesn’t grasp the thorny monetary necessity.”

The cost to insure Turkey’s debt in dollars using five-year credit default swaps fell nine basis points to 255 today, according to data compiled by Bloomberg. That compares with 182 for Russia and 212 for Brazil.

Turkey’s central bank has “a track record of disappointing,” Bank of America’s Hamzaoglu said. “The size will matter. Now markets expect at least some 250-300 basis points” of increases, he said.

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