ISTANBUL: Turkey's central bank is expected to keep interest rates on hold on Tuesday, betting instead on the US Federal Reserve to help ease pressure on emerging markets by unwinding its massive stimulus programme only gradually.
Governor Erdem Basci last month ruled out interest rate hikes to defend the lira, hammered in recent months by fears about the Fed's tapering plans. But he left economists scratching their heads by simultaneously forecasting the currency would strengthen by the end of the year.
The bank has since suggested more surprises lie ahead in its unorthodox efforts to manage the lira, which hit a record low of 2.0840 to the dollar on Sept. 5, including using its gross reserves.
That suggests it could lower forex reserve requirements or adjust its "reserve option coefficients" - which determine how much lenders pay to hold a portion of their lira reserves in forex or gold - to hike dollar liquidity and support the lira.
All 14 economists in a Reuters poll expected the bank to keep rates on hold. Six forecast a cut in reserve option coefficients or foreign exchange reserve requirements.
"Given Turkey's large external financing needs and comparatively meagre gross reserve, such measures are mostly cosmetic, if global markets do not support them," said Barclays Capital economist Christian Keller in a note to clients.
"The central bank's confidence in its ability to defend the lira should be seen as a 'macro call' for a rebound in emerging market capital flows," he said.
The bank raised its overnight lending rate by 50 basis points to 7.75 percent last month in a bid to prevent a slide in the lira, hit by worries that Fed tapering would reverse the flows of cheap liquidity into emerging markets like Turkey.
It kept its one-week repo policy rate at 4.50 percent and its overnight borrowing rate at 3.50 percent.
REPRIEVE
The Fed meets on Tuesday and Wednesday to decide when and by how much to scale back its asset purchases from the current pace of $85 billion a month.
The withdrawal on Sunday of former Treasury Secretary Larry Summers as a candidate to head the US central bank has led investors to bet that its next chief will extend an era of easy money that has flooded global markets with cash.
That appeared on Monday to have bought Basci some time, helping the lira to strengthen back over the psychological 2 to the dollar level.
"The central bank has a track record of good fortune in the conduct of monetary policy, saved on numerous occasions over the past couple of years by waves of developed markets quantitative easing," said Standard Bank economist Timothy Ash.
He pointed to 2011, when the lira was battered and Turkey's central bank reserves were melting, until the European Central Bank funnelled over a trillion euros to banks with twin three-year liquidity operations in late 2011 and early 2012.
Turkey is particularly vulnerable to tightening by central banks in developed economies because it is heavily dependent on foreign inflows to finance its current account deficit, running at over 7 percent of national output.
But with an election cycle starting next March, Prime Minister Tayyip Erdogan's government is eager to maintain robust economic growth and the central bank has been cautious not to jeopardise that by raising rates.
"I guess the question still is if this is another of those occasions whether the Erdogan administration and the central bank would use the reprieve to further the rebalancing of the Turkish economy," Ash said.
Turkey's economy expanded 4.4 percent in the second quarter, but the make up of that growth continues to worry economists and policymakers as imports grew much higher than exports, causing a huge trade shortfall.
Comments
Comments are closed.