Turkish lira
Mehmet Kalkan
Turkey’s monetary policy committee on Thursday chose to keep the key interest rate unchanged at 19%, in anticipation of large-scale market movements.
Although not surprising for investors looking at the central bank, the “dovish” signal still risks more volatility for the country’s currency, as it eviscerates the likelihood of higher rates in the future to reduce Turkey’s double-digit inflation.
“We believe that eliminating the tightening bias against rising inflation expectations suggests that the TCMB (Turkish Central Bank) now has a more penetrating reaction function,” Goldman Sachs wrote in a note on Thursday, stressing that the bank has essentially eliminated bias. to tighten interest rates in its press release.
“Therefore, we see higher risks of premature rate cuts or reduced loan growth,” Goldman said, although the investment bank does not see the country as able to cut interest rates until the fourth quarter of this year.
The Turkish lira has lost significant value in the last 12 months, with locals being less able to afford more expensive goods and imports as analysts describe Turkish President Recep Tayyip Erdogan’s stubborn refusal to raise rates and reduce rates. rising foreign exchange reserves and a current account deficit Contrary to popular economic thinking, Erdogan believes that interest rates are “bad” and cause inflation, rather than the other way around.
The dollar has gained more than 8% against the pound so far. Inflation in Turkey is currently 15%.
The Turkish lira fell about 16% in a single day on March 22 after Erdogan fired former central bank chief Naci Agbal, who significantly raised interest rates in less than five months since taking office. labor – which most investors have agreed is necessary to cool Turkey’s frothy inflation.
Erdogan replaced him with Sahap Kavcioglu, now the central banker’s fourth chief in two years, who is believed to be more flexible than Ergodan’s demands and tendency to lure politics into monetary policy.
Timothy Ash, senior strategist in emerging markets at Bluebay Asset Management, described the central bank’s latest move as “removing the bridge to cut at first.”
“Inflation is rising, the current account is expanding and reserves are falling,” he wrote in a note on Thursday. “How can CBRT cut without sacrificing the pound?”
Goldman Sachs sees inflation rise to 18% from a year earlier in April and predicts a rise in the country’s current account deficit. “A premature reduction of the rate in these conditions could lead to the renewal of the pound’s volatility, which we believe will be the main constraint for how soon the TCMB is eased,” the bank wrote.