Turkey: Too Little, Too Late By Wall Street Journal ISTANBUL—The dust has settled on Turkey’s surprise decision to raise lending rates Tuesday. In a nutshell, the market’s response is: meh. Tuesday, Turkish central bank Governor Erdem Basci hiked one of the key rates by half a percentage point, increasing the ceiling of the interest-rate corridor to 7.75%, the highest since February. It was the second rate rise in as many months, and a big deal for a central bank that earlier this year resisted tightening monetary policy. Instead, it tried to prop up its currency, the lira, with a series of dollar sales. But the lira just kept on sliding. Wednesday, it sank by more than 1% to 1.965 per dollar and hit a new all-time low of 2.6349 against the euro. Bonds also wilted, as benchmark two-year government bond yields jumped by as much as 0.2 percentage points to 9.56%, close to a one-year high. Bond yields rise as prices drop. The central bank responded yet again. In an e-mailed statement, Mr. Basci declared the central bank will sell a minimum of $100 million a day until further notice, and continue its additional tightening so that policymakers will lend only at the top end of its range of interest rates. The move helped the lira to recover very slightly, but still didn’t turn the tide. “Today’s statement will likely have a limited and temporary effect on the lira and bonds,” said Ibrahim Aksoy, an economist at Seker Invest in Istanbul. “Volatility in the lira, bond market, and hence in the equity market will likely continue until the central bank of Turkey increases the upper boundary of the interest rate corridor to a level convincing market players of the health of the lira.” Fueling Turkey’s broader selloff is widespread dissatisfaction with the central bank’s moves, which analysts say was timid at best and useless at worst (see footnote). Note that several of the central bank’s interest rates including the benchmark were left on hold; only the overnight lending rate rose, which determines borrowing costs only under certain circumstances. Mr. Basci’s efforts to calm markets come as investors are increasingly skeptical of Turkey’s ability to finance a gaping current-account deficit and stem the currency depreciation that threatens to accelerate inflation, which rose to 8.88% in July. “As an inflation-targeting country, Turkey shouldn’t allow such a depreciation in the currency because it will have a very negative impact on the outlook. This would turn into a self-fulfilling cycle of declining lira and rising inflation, and its damage to the economy will be very bad. The central bank needs to show that it’s doing everything it can to prevent this, currently the market sentiment is deteriorating,” said Nilufer Sezgin, chief economist at Erste Securities in Istanbul. Tim Ash, an emerging-markets analyst at Standard Bank, had a similar take: “My sense is that the central bank is much more concerned about growth, and helping the government achieve its 3-4% growth target, is less concerned about inflation–8.8% in July, versus the 5% target–and hence feels comfortable with the lira weakening and is willing to live with the consequences… The risk is that the market loses confidence in the central bank, and without a larger interest rate move, to show its intent, that the current sell-off becomes a rout, and then, given the underlying weak current account and external financing position, that we see a much larger move for the lira–say up to 2.10 – 2.20 against the dollar.” The precise mechanics of the central bank’s rate rise have also left many observers nonplussed, as the priciest borrowing rate applies to all banks on certain “exceptional” days when the policymakers opt for additional monetary tightening. Mr. Basci’s comments on Wednesday indicate that “exceptional” days may just become “routine” for the time being, economist said. “[Tuesday’s] decision, with a hike only for exceptional days, does little to dispel market concerns that the central bank of Turkey is reluctant to freely use the interest rate tool to defend the lira. So in terms of ‘optics,’ this hike does not look sufficiently supportive of the lira; and in order to be more confident about the currency, the market will need to see more frequent exceptional days,” said Inan Demir, chief economist at Finansbank in Istanbul. Just as a footnote, it’s worth bearing in mind events and policy decisions along the way. To wit: May 17, 2013: Turkey’s central bank cuts interest rates across the board, the policy rate drops to record low of 4.5% as the interest-rate corridor – ranging from the overnight borrowing rate to the overnight lending rate – settles at 3.5% to 6.5%. May 22: U.S. Federal Reserve Chairman Ben Bernanke sends first signal for tapering bond purchases as soon as late 2013, spurring a selloff throughout emerging markets. May 31: Anti-government protests erupt across Turkey. June 18: Turkey’s central bank keeps rates steady at monthly meeting, fueling a three-week slide that sees lira drop to a record low against the dollar. July 23: Turkey’s central bank increases ceiling of interest rate corridor by 75 basis points to 7.25% in surprise move. Lira rallies to a one-month high against the dollar. Aug. 15: Turkey’s current-account deficit widens to a 10-month high of $53.6 billion, or 6.8% of GDP. Lira gains slightly against the dollar as the gap is less than forecast. Aug. 20: Turkey’s central bank increases ceiling of interest rate corridor by 50 basis points to 7.75% in surprise move, lira gains slightly against the dollar. Aug. 21: Turkey’s central bank announces additional monetary tightening until further notice, begins minimum $100 million currency auctions. Lira recovers some lost ground after falling by more than 1% against the dollar.
Posted on: Wed, 21 Aug 2013 18:30:08 +0000
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