Turkey holds rates in surprise that sends lira to new low

A gold dealer counts Turkish lira banknotes at his shop at the Grand Bazaar in Istanbul, Turkey, August 6, 2020. (Reuters)
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Updated 22 October 2020

Turkey holds rates in surprise that sends lira to new low

ISTANBUL: Turkey’s central bank bucked expectations for a big interest rate hike on Thursday and sent the lira plunging to a record low by holding its policy rate at 10.25% and saying it had already made progress in containing inflation.
The bank, which also surprised last month when it hiked rates, said it would continue with liquidity measures to tighten money supply. It raised the uppermost rate in its corridor, the late liquidity window (LLW), to 14.75% from 13.25%. A Reuters poll of 17 economists had expected the bank to raise its key one-week repo rate by 175 basis points to address Turkey’s weak currency and double-digit inflation. Forecasts ranged from hikes of 100 to 300 bps.
The decision to leave the rate unchanged sent the lira down more than 2% to near 8 versus the dollar and prompted economists to question the central bank’s commitment to lowering inflation and its independence from the government.
“The (bank) is now back to a more unpredictable and opaque monetary policy framework. It appears as a severe miscalculation,” Per Hammarlund, chief emerging markets strategist at Swedish bank SEB.
The key policy rate remains below annual consumer price inflation, which stood at 11.75% in September, leaving real rates negative for lira depositors.
Turkey’s central bankers had surprised markets with a 200 basis point rate hike in September, the first monetary tightening in two years as it sought to rein in inflation.
Its so-called backdoor measures to rein in credit have raised the average cost of funding to 12.52% from a low of 7.34% in July. The LLW adjustment gives the bank more scope to raise funding costs.
“A significant tightening in financial conditions has been achieved, following the monetary policy and liquidity management steps taken to contain ... risks to the inflation outlook,” the bank’s monetary policy committee (MPC) said.
It said liquidity measures will carry on “until the inflation outlook displays a significant improvement.”
The lira touched a record low of 7.9845 against the dollar.
It is down 25% this year in a selloff prompted by concerns about high inflation and the central bank’s badly depleted FX reserves, and geopolitical worries including the prospect of trickier US ties under a possible Joe Biden White House.
Last month’s hike in the policy rate reversed a nearly year-long easing cycle in which it fell rapidly from 24%, where it was set in the face of a 2018 currency crisis.
“Last month the central bank took an important step to restore credibility and today’s decision seems like a step back. All this positive impact has been reversed significantly,” said Piotr Matys, senior EM FX Strategist at Rabobank.
Turkey’s economy contracted 10% in the second quarter because of the coronavirus pandemic and measures to combat it. Tensions in the Eastern Mediterranean and in the Nagorno-Karabakh conflict are also clouding the outlook.


US sanctions Chinese and Russian firms over Iran trade

Updated 29 November 2020

US sanctions Chinese and Russian firms over Iran trade

  • Four companies accused of ‘transferring sensitive technology and items’ to missile program

LONDON: The US has slapped economic sanctions on four Chinese and Russian companies that Washington claims helped to support Iran’s missile program.

The four were accused of “transferring sensitive technology and items to Iran’s missile program” and will be subject to restrictions on US government aid and their exports for two years, Secretary of State Mike Pompeo said in a statement.

The sanctions, imposed on Wednesday, were against two Chinese-based companies, Chengdu Best New Materials and Zibo Elim Trade, as well as Russia’s Nilco Group and joint stock company Elecon.

“These measures are part of our response to Iran’s malign activities,” said Pompeo. “These determinations underscore the continuing need for all countries to remain vigilant to efforts by Iran to advance its missile program. We will continue to work to impede Iran’s missile development efforts and use our sanctions authorities to spotlight the foreign suppliers, such as these entities in the PRC and Russia, that provide missile-related materials and technology to Iran.”

The Trump administration has ramped up sanctions on Tehran after withdrawing from the Iran nuclear deal in 2018.

Earlier this week, Pompeo met Kuwaiti Foreign Minister Sheikh Ahmad Nasser Al-Mohammad Al-Sabah, when the campaign of pressure on the Iranian regime was also discussed.

“I want to thank Kuwait for its support of the maximum pressure campaign. Together, we are denying Tehran money, resources, wealth, weapons with which they would be able to commit terror acts all across the region,” he said.

It is not yet clear how the incoming administration of Joe Biden will deal with Tehran and whether it wants to revive the nuclear deal which would be key reviving the country’s battered economy. The Iranian rial has lost about half of its value this year against the dollar, fueling inflation and deepening the damage to the economy.

Iran’s economy would grow as much as 4.4 percent next year if sanctions were lifted, the Institute of International Finance (IIF) said last week. 

The economy is expected to contract by about 6.1 percent in 2020 according to IIF estimates.