Turkish lira
Mehmet Kalkan
Turkey’s monetary policy committee on Thursday chose to keep its core interest rate unchanged at 19%, in a move that markets generally expect.
While not surprising for investors watching the central bank, the pigeon signal nonetheless risks more volatility for the country’s currency, as it excludes the likelihood of higher rates in the future to curb double-digit inflation in Turkey.
“We believe that the removal of the intensified bias against rising inflation expectations indicates that the TCMB (Turkish Central Bank) now has a more dubious response function,” Goldman Sachs wrote in a note on Thursday, emphasizing the bank’s bias decisively removed. in the direction of the press release to tighten interest rates.
“Therefore, we see higher risks for a premature interest rate cut or easing through increased lending,” Goldman said, although the investment bank does not see the country taking the chance to cut interest rates further until the fourth quarter of this year.
Turkey’s lira has lost significant value over the past 12 months, and locals are less able to pay more for goods and imports because of what analysts describe as Turkish President Recep Tayyip Erdogan’s stubborn refusal to raise rates. as well as the shrinking foreign exchange reserves and a larger current account deficit. Unlike with general economic thinking, Erdogan believes that interest rates are ‘bad’ and that they cause inflation, rather than the other way around.
The dollar has risen more than 8% on the lira to date. Inflation in Turkey is currently 15%.
The Turkish lira plunged about 16% in one day on March 22 after Erdogan sacked former central bank chief Naci Agbal, who significantly raised interest rates during his less-than-five-month job – something most investors agreed to be needed to cool Turkey’s foaming inflation. .
Erdogan replaces him with Sahap Kavcioglu, now the fourth head of the central banker in two years, who is believed to be more flexible to Ergodan’s demands and tendency to involve politics in monetary policy.
Timothy Ash, senior strategist for emerging markets at Bluebay Asset Management, described the central bank’s latest move as ‘clearing the deck to cut at the first opportunity.’
“Inflation is rising, the current account is growing and reserves are falling,” he wrote in a note on Thursday. “How can the CBRT cut without giving up the lira?”
Goldman Sachs sees that inflation will rise by 18% year-on-year in April and predicts that the current account deficit will increase in the country. “A premature interest rate cut under these circumstances could lead to renewed volatility in lira, which we believe will be the main constraint on how early the TCMB eases,” the bank wrote.