Turkey set to raise rates, balancing lira and growth concerns

The Turkish Central Bank is worried about economic slowdown. (Reuters)
Updated 12 September 2018
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Turkey set to raise rates, balancing lira and growth concerns

  • The lira has slumped 40 percent against the dollar this year, weakened partly by unease over President Recep Tayyip Erdogan’s influence on monetary policy
  • The central bank confounded expectations for a rate increase at its July meeting, fueling the belief it is under pressure from Erdogan

ISTANBUL: The Turkish Central Bank is expected to raise interest rates on Thursday to calm a currency crisis, but forecasts for the scale of the increase vary widely as the bank balances concerns over lira weakness with worries about an economic slowdown.
The lira has slumped 40 percent against the dollar this year, weakened by unease over President Recep Tayyip Erdogan’s influence on monetary policy and more recently a bitter row with the US that has unsettled investors.
The central bank confounded expectations for a rate increase at its July meeting, fueling the belief it is under pressure from Erdogan, who has called interest rates the “mother and father of all evil” and frequently urges they be kept low.
But after inflation surged in August to its highest in nearly 15 years, the central bank said that it would take action against “significant risks” to price stability — a rare move to soothe financial markets.
It said its monetary stance will be adjusted at Thursday’s policy committee meeting. Analysts saw this as pointing to an increase in the benchmark one-week repo rate, now 17.75 percent — less than the annual inflation rate of 17.9 percent.
Phoenix Kalen, strategist at Societe Generale, forecast the repo rate would be raised to 20.75 percent and would be restored as the main policy instrument after a period during which the effective funding rate has been 19.25 percent.
“Although this amount of monetary tightening may disappoint market expectations and spark renewed TRY weakness, the decision would reflect the prioritization of Turkish authorities’ concerns regarding a rapidly decelerating economy,” Kalen said.
Turkey’s economic growth slowed to 5.2 percent in the second quarter, data showed this week, and the economy is expected to slow again in the second half.
In a Reuters poll, all 11 economists predicted the benchmark one-week repo rate would be raised.
The average forecast was to 22 percent, but predictions ranged from an increase of 225 basis points to 725 basis points.


Stronger US dollar unlikely to derail bullish view on commodities — Goldman Sachs

Updated 21 September 2018
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Stronger US dollar unlikely to derail bullish view on commodities — Goldman Sachs

  • The dollar has been lifted by a stronger-than-expected US economy, the world’s largest
  • A stronger greenback makes the purchase of dollar-denominated international commodities more expensive for holders of other currencies

BENGALURU: Goldman Sachs said a stronger dollar is unlikely to derail its bullish view on commodities, which are likely to find support from physical shortages.
The dollar has been lifted by a stronger-than-expected US economy, the world’s largest, and that’s a positive sign for global growth, the US investment bank said.
The US dollar index has lost more than 1 percent this week, but this follows months of strong demand over US-China trade-related tensions, as investors bet the greenback would gain at the expense of riskier currencies.
“The risk aversion this summer created significant emerging market destocking, particularly in China, as consumers attempted to avoid a strong dollar and tariffs by liquidating inventories,” Goldman said in a note dated on Thursday.
A stronger greenback makes the purchase of dollar-denominated international commodities more expensive for holders of other currencies, making buyers and users more likely to draw on any stored materials in preference to imports.
“This liquidation, however, has a physical limit with Chinese destocking having already created significant increases in physical (premiums) for oil and metals – a sign of physical shortages.”
Going forward, oil had a strong fundamental outlook helped by US demand growth, supply losses and disruptions, and still constrained US shale output, Goldman said.
The bank said its near-term Brent crude oil price target remained at $80 a barrel.
The bank said it was moderating its bullish view for gold due to a sell-off in emerging markets, and it lowered its 12-month price forecast for the metal to $1,325 per ounce, down from $1,450 an ounce earlier.