Turkey’s central bank promises action after inflation surges to 18%

The comments from Turkey’s central bank underscore the volatile outlook for prices amid a currency crisis. (Reuters)
Updated 03 September 2018
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Turkey’s central bank promises action after inflation surges to 18%

  • The lira has lost 40 percent of its value against the dollar this year
  • President Recep Tayyip Erdogan wants to see lower borrowing costs

ANKARA: Turkey’s central bank said it would adjust its monetary stance given “significant risks” to price stability, a rare move to calm financial markets after inflation surged to its highest in nearly a decade and a half on Monday. The comments from the central bank underscore the volatile outlook for prices amid a currency crisis. The lira has lost 40 percent of its value against the dollar this year, driving up the cost of goods from potatoes to petrol and sparking alarm about the impact on the wider economy and the banking system.
Inflation jumped 17.9 percent year-on-year in August, official data showed, outstripping market expectations and marking its highest level since late 2003.
“Recent developments regarding the inflation outlook indicate significant risks to price stability. The central bank will take the necessary actions to support price stability,” the bank said in a statement.
“(The) monetary stance will be adjusted at the September monetary policy committee meeting in view of the latest developments.”
For investors, the main question has been whether the central bank will be able to sufficiently hike interest rates at its next policy-setting meeting on Sept. 13 to tame inflation. It left rates on hold at its last meeting in July, confounding expectations and sending the lira sharply weaker.
President Recep Tayyip Erdogan, a self-described “enemy of interest rates,” wants to see lower borrowing costs to keep credit-fueled growth on track. Investors, who fear the economy is set for a hard landing, want big rate hikes.
Finance Minister Berat Albayrak told Reuters in an interview on Sunday that the bank was independent of the government and would take all necessary steps to combat inflation. He also promised a “full-fledged fight” against inflation.
By signalling that it was ready to take action, the central bank may now have inadvertently set financial markets up for disappointment if it doesn’t deliver a hefty increase, said Piotr Matys, an emerging markets forex strategist at Rabobank.
“A proper rate hike is required and by making a pledge to raise interest rates, the central bank may have raised the bar for itself to exceed expectations on Sept. 13,” Matys said. “The central bank basically has no room to disappoint.”
The lira briefly recovered some losses immediately after the central bank’s announcement. By 0852 GMT it was more than 1 percent weaker on the day at 6.6200 to the dollar.
The bank is likely to deliver a rate hike of 2 percentage points on Sept. 13, far short of the 7-10 percentage points that investors would like to see, said Jason Tuvey of Capital Economics in a note to clients.
Such increases are needed “to bring real interest rates back to positive territory and reassure the markets that policymakers are willing and able to tackle high inflation,” he said.


Egypt stock market plunges as retail investors take flight

Updated 19 September 2018
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Egypt stock market plunges as retail investors take flight

  • Biggest index drop in Egypt since mid-2016
  • Saudi Arabia outperforms in Gulf

LONDON: Egyptian stocks tumbled to their lowest level this year on Wednesday as retail investors took flight.
A sharp rise in Suez Canal revenues, a major foreign exchange earner for the country, was not enough to quell investors concerns about the strength of the currency.
The main Egyptian stock index lost 3.8 percent which some fund managers blamed on generally negative sentiment toward emerging markets worldwide as well as more local speculation about possible currency devaluation.
“Our channel checks suggest the sell-off in the Egyptian market is local retail and institutions driven, on currency fears and speculation over a further round of devaluation,” said Vrajesh Bhandari, portfolio manager at Al Mal in Dubai, Reuters reported.
“Selling is further intensified as margin calls are triggered and technical support levels break down. The country canceled three consecutive Treasury auctions, citing investors’ unrealistic yield demands.”
Egypt’s Suez Canal revenues rose to $502.2 million in August up 6.7 percent from a year earlier according to official data released on Wednesday.
Elsewhere regional stock markets closed mostly lower with the exceptions of Abu Dhabi which edged 0.2 percent higher and Saudi Arabia, the best regional performer, which rose by 1.1 percent.
Saudi stocks are benefiting from the strong oil price which eased slightly yesterday but still hovered just under $79.
OPEC and some other oil producers including Russia will meet in Algeria on Sept. 23 to discuss how to allocate supply increases within their quota framework to offset the loss of oil exports from Iran following the introduction of sanctions by the US.
Those measures will come into force on Nov. 4 and data suggests that buyers are already retreating from Iranian crude purchases.
A key question for the oil price as well as regional stock markets in the weeks ahead will be the extent to which other Gulf oil exporters can compenaste for the loss of Iranian supplies by pumping more.