Traders Endorse Turkey's New Bank Chief as Lira Bears Retreatby
Risk-reversal rate slides as Cetinkaya focuses on inflation
Comments ease some investor concerns: Nomura's Gullberg
A week into Murat Cetinkaya’s term as Turkey’s central bank governor and bearish bets on the lira have fallen to the lowest level in almost two years.
The premium for 12-month options to sell lira versus the dollar rather than to buy the Turkish currency fell to 4.75 percentage points on Tuesday, the least since July 2014, after Cetinkaya said curbing inflation remains the top priority. While consumer price growth has stayed above the central bank’s target since 2011, the emphasis on price stability by the monetary authority chief in his first major public appearance signaled he wasn’t giving in to government calls to radically cut interest rates.
Cetinkaya’s comments “will ease market participants’ concerns, mine as well, but obviously talk is one thing, and while concerns will be reduced they will not disappear,” said Henrik Gullberg, a senior emerging-market strategist at Nomura International Plc in London, referring to possible premature cuts in rates.
Former central bank Governor Erdem Basci faced persistent calls by President Recep Tayyip Erdogan and senior government officials to lower rates and prioritize growth over inflation. That pressure eroded investor confidence, fueling a 20 percent depreciation in the lira in 2015, its third annual decline and biggest drop since the global financial crisis in 2008.
Cetinkaya lowered the upper band of a three pronged interest-rate corridor by half of a percentage point last week, in line with expectations, in his first rate meeting as head of the central bank. The cut, the second consecutive reduction, was a “measured” step toward simplifying Turkey’s monetary policy framework, he said, referring to a move initiated by Basci to narrow the corridor around one main rate.
The lira fell 0.4 percent to 2.8323 per dollar as of 6 p.m. in Istanbul after jumping 0.8 percent on Tuesday, the biggest gain in four weeks. While the currency is little changed since Cetinkaya took over as the head of the monetary authority on April 19, it is still among the best performers in emerging markets. The risk-reversal rate has dropped 0.55 percentage points over the same period, according to data compiled by Bloomberg.
Cetinkaya left this year’s inflation forecast at 7.5 percent. Consumer-price growth slowed to 7.46 percent in March, the lowest in seven months while core inflation, which excludes volatile components such as food and energy prices, dropped to 9.51 percent from the highest since July 2014.
Investors still need “confirmation at the next meetings that further rate cuts only materialize after core CPI deceleration,” said Nomura’s Gullberg.