Lira Stability Needs at Least 100Bps Hike, Fidelity's Greer Says

The Turkish lira’s rebound from a record low could fizzle out if the central bank doesn’t act aggressively to support it, delivering at least 100 basis points in interest-rate increases, according to Fidelity International Ltd.’s senior emerging-market debt trader Paul Greer.

The currency has climbed almost 3 percent from an all-time low of 3.9826 per dollar on Nov. 22, spurred by comments from President Recep Tayyip Erdogan’s policy advisers that the central bank would tighten policy if needed. It also gained from investor relief over the fact that the U.S. trial of a Turkish banker, accused of helping Iran evade sanctions, so far hasn’t led to any worsening of bilateral tensions.

Expectations for higher borrowing costs in Turkey have increased after the nation’s inflation accelerated to almost 13 percent in November, the fastest pace since 2003. The central bank needs to raise the rate it charges on funds lent via the so-called late liquidity window to at least 13.25 percent at a Dec. 14 review, from 12.25 percent currently, to ensure the lira doesn’t weaken again, according to Fidelity’s Greer.

“I think that’s the absolute minimum,” London-based Greer said by phone on Wednesday. “Anything less than that and the market will start to return back to some of those weaker levels we saw a couple of weeks ago.” The market had feared that the banker trial in New York could release “some nasty evidence against the very top of the Turkish administration and so far we haven’t seen that,” he said.

The central bank has already raised the cost of funding by almost 400 basis points this year to quell heightened currency volatility fueled by political turbulence and the prospect of higher U.S. rates. A “more simple and stronger” monetary stance would help lower inflation, the state-run Anadolu Agency reported Turkey’s Deputy Prime Minister Mehmet Simsek as saying this week.

The lira weakened 0.5 percent Thursday to 3.8710 per dollar as of 5:27 p.m. in Istanbul.

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