Turkish central bank facesinterest rate dilemma



Reuters

Published — Friday 12 July 2013

Last update 12 July 2013 2:11 am

| نسخة PDF Print News | A A

ISTANBUL: Turkey’s central bank is facing calls to raise interest rates to steady the embattled lira despite political pressure from Prime Minister Tayyip Erdogan to keep rates low — a dilemma which could put the bank’s credibility at stake.
The lira has tumbled some 9 percent against the dollar since the beginning of May, $ 3.55 billion sold off in two days this week alone in its defense. Investor concerns the US Federal Reserve would scale back stimulus measures and anti-government protests across Turkey last month have driven losses.
An overnight signal that US money-printing may not end as soon as expected has eased pressure on the lira for now but Turkey remains most vulnerable to foreign capital outflows among emerging markets as it combats a huge current account gap.
Investor concerns about the bank’s room for maneuver have risen since Erdogan, who has overseen a boom in the Turkish economy during his 10 years in power, accused a ‘high interest rate lobby’ of instigating unprecedented protests against his government last month.
Without identifying the grouping any further, he accuses it of manoeuvring to undermine the Turkish economy in order to curb growing Turkish political and economic influence.
Such comments cast doubt on prospects for a rate hike, although a sharp whittling down of net reserves, now estimated by bankers to be below $40 billion, could set limits to the forex auctioning policy pursued this week.
“The central bank’s willingness to undertake such a rate adjustment is unclear, in particular given the strong government rhetoric against ‘high interest rate lobbies’,” said Christian Keller, Barclays Capital economist.
“Ultimately, only a combination of continued pressure on the lira and further forex reserve losses might force the central bank to act,” he said.
Analysts said the central bank could not afford to allow the lira depreciation to continue, while above-target inflation and rapid consumer loan growth also argued against the current low level of interest rates.
“The central bank cannot let the currency go as this could potentially lead to an inflation/depreciation spiral, hurt the bank’s credibility dearly and have a detrimental impact on corporate balance sheets,” JPMorgan economist Yarkin Cebeci said.
“Instead, if the lira remains under pressure, hiking rates would be a safer strategy for the central bank...We expect the bank to hike the policy rate at most by 100 basis points as a sharper increase could lead to increased political pressure and its benefit would be doubtful,” he said.
The central bank kept its main policy rate, the one-week repo rate, at 4.50 percent, its borrowing rate at 3.5 percent and lending rate at 6.5 percent at its last meeting on June 18. Its next meeting is on July 23.
However the bank is more concerned about growth which slowed sharply to 2.2 percent last year. It has undertaken a series of rate cuts since last September to try to spur the economy until last month, when it kept its rates on hold.
The bank is now focused on tightening liquidity to support the lira, burning $3.55 billion in two days this week after the lira hit an all-time low of 1.9737 against the dollar on Monday. It has sold $6.2 billion this year.
Central Bank Governor Erdem Basci vowed the tightening would be “strong, effective, temporary” and said it would only make a change in the bank’s interest rate corridor if the tightening fails to prevent excessive loan growth.
However the bank’s reliance on forex-selling auctions to support the lira has its limits.
“When autumn comes the central bank will have to change interest rates. The gap between market rates and the central bank interest rates widened so much. Benchmark bond yield rose to 9.3 percent while the policy rate is at 4.5 percent,” said Mehmet Besimoglu, chief economist at Oyak Securities.
With elections looming next year, Erdogan will have to weigh populist pressure in government to keep rates low with the need to protect the gains of his decade in power which have transformed Turkey economically and brought financial stability.
Erdogan has won three national elections in a row and appears still to enjoy broad support across Turkey; but it is not clear how June protests, and Erdogan’s hard-line declarations, will be reflected in next year’s local polls.
“The political authority would not favor a rate hike ahead of an upcoming election period,” Besimoglu said.
However, some market watchers said Erdogan’s resistance to raising rates could be eased by more pragmatic voices in government such as Deputy Prime Minister Ali Babacan.
“At the end of the day Erdogan listens more to Babacan. Erdogan has the final word but as long as Erdem Basci has the support of Babacan we will see a quasi-independent central bank,” said a London-based fund manager who declined to be named.
“Erdogan may say no at first to rate rises but if Babacan insists he will eventually agree,” the fund manager said.
Another key figure in Erdogan’s decision making will be Finance Minister Mehmet Simsek, a former London banker, who highlighted in comments on Twitter overnight the doubling in Turkey’s benchmark bond yield to 9.4 percent since May.
Blaming the sharp rise in yields on global economic developments and the increasing risk premium due to last month’s protests, Simsek’s comments underlined the government’s concerns about higher interest rates.
“If the rise in yields permanent, unfortunately, a bigger portion of the taxes we collect will have to be allocated to interest instead of services,” he wrote.

What's happening around Saudi Arabia

RIYADH: Custodian of the Two Holy Mosques King Salman briefed the Cabinet, on Monday, about the message he sent to the Kuwaiti emir and the messages he received from the Moroccan king and the Qatari emir.The king also spoke about the outcome of his m...
RIYADH: The Eastern Mediterranean Office (EMRO) of the World Health Organization (WHO) on Monday announced that the region is considered a Zika virus-free zone.Dr. Alaa Alwan, the regional director of EMRO, said that it does not mean that Middle East...
JEDDAH: The Saudi Health Council is working to establish an electronic system to prevent manipulation of sick leave holidays.Dr. Yaqoob Al-Mazrouh, secretary-general of the council, disclosed this during a seminar on Sunday. He did not elaborate on h...
RIYADH: Specialized Clinics Arabia (SCA) treated a total of 9,220 Syrians at the Zaatari Refugee Camp in Jordan during the month of January 2016, according to Dr. Hamid Mufalana, SCA medical director.“Many of the patients were children who were given...
JEDDAH: The Jeddah police have solved the mystery surrounding the thrashing of a man by another, the video clip of which had gone viral.It was a Herculean task for the police to search for the victim, who had not bothered to lodge any complaint. The...
JEDDAH: The Cutoms Department at Yanbu’s Prince Abdul Mohsen bin Abdul Aziz Airport recently foiled an attempt to smuggle 64,165 Captagon pills found hidden in four boxes.Saad Al-Buqami, director-general of Customs at the Airport, said: “During our c...
AL-AHSA: Plans are afoot to turn the Al-Ahsa dates festival into an international event by adopting top standards in the manufacture, packaging and marketing of the product, Adel Al-Mulhim, the general supervisor of the festival, has said.Speaking du...
RIYADH: A gang comprising two women and youth has been arrested for allegedly looting cash from pharmacies and snatching women’s handbags in malls.Col. Fawaz bin Jameel Al-Maiman, police media spokesman of the Riyadh region, said the arrests were mad...
RIYADH: Riyadh Gov. Prince Faisal bin Bandar on Sunday called for conservation of water and electricity, even as the Water and Electricity minister said Saudi Arabia will need an investment of SR500 billion for power projects over the next 10 years t...
RIYADH: More than 200,000 people accused of various crimes were investigated by the Bureau of Investigation and Public Prosecution (BIPP) in the financial year of 1435-1436 A.H.Among the 218,000 who were investigated, around 30 percent or 65,000 were...
RIYADH: Thousands of Saudis have visited the German pavilion at the Janadriyah festival since it was opened by Custodian of the Two Holy Mosques King Salman last week, in the presence of German Foreign Minister Frank-Walter Steinmeier and German Amba...
DAMMAM: The cold wave in many parts of the Kingdom over the last week caused a decline of between 30 percent and 50 percent in farm production. This decline in turn drove prices of agricultural products at wholesale markets up by 30 percent.Farmers s...
RIYADH: The Ministry of Commerce and Industry warned on Monday that heating devices should have a voltage of 220 volts with a capacity not exceeding 2,500 watts.The announcement was made when MCI inspectors seized more than 3,000 substandard heating...
ALKHOBAR: Nearly 100 leading figures in the government and private institutions have completed training programs specializing in integrity and anti-corruption provided by the Saafah Foundation for Good Example in Riyadh, Jeddah and Alkhobar.The secre...
JEDDAH: Iraqi authorities executed in Baghdad on Sunday a Saudi prisoner, Abdullah Azam Al-Qahtani, 35, on charges described by his family as fabricated.Al-Qahtani had spent almost 13 years in the Iraqi prisons.Rumors about the execution of Al-Qahtan...

Stay Connected

Facebook