Saturday 16 / November / 2024
Ankara: Turkey’s central bank will likely slow the pace of interest rate cuts when it meets after the failed coup attempt triggered a sell-off in the currency and sovereign debt.
Citing heightened political risk after this weekend’s botched takeover attempt, several economists revised their predictions, taking the median forecast to a quarter-point cut in the overnight lending rate instead of 50 basis points previously, a Bloomberg survey showed. Seven of 21 say the bank will leave the rate unchanged at 9 per cent.
Governor Murat Cetinkaya and his rate-setting Monetary Policy Committee trimmed the measure — the upper limit of a range used by the central bank — by 50 basis points in each of the past three months amid a favourable global backdrop. Yet investor confidence was shattered on Friday night when tanks rolled in Ankara and Istanbul before authorities eventually restored order. And while the currency pared losses on Monday, bonds tumbled and the cost of insuring the country’s debt soared.
"The central bank may prefer giving the message of ‘business as usual’,” said Bora Tamer Yilmaz, an economist at Ziraat Invest in Istanbul, who changed his prediction to a 25 basis-point reduction. "On the other hand, due to the inherent uncertainty of the developments, they may prefer taking a considerably more measured step.”
Unlimited liquidity
Policy makers will likely keep the overnight borrowing rate and the benchmark repurchase measure unchanged at 7.25 per cent and 7.50 per cent, respectively, according to two separate Bloomberg surveys.
The central bank on Sunday pledged to provide unlimited liquidity to lenders, and said it would support the lira by removing the limits on foreign-currency deposits that commercial banks are allowed to use as collateral. Deputy Prime Minister Mehmet Simsek, a former Merrill Lynch banker, urged investors not to panic, saying Turkey’s economic foundations remained "solid.”
Although the coup failed, its occurrence reflects the political challenges that Turkey faces, Moody’s Investors Service said on Monday. The credit rating agency kept Turkey at investment grade, as did Fitch, but put it on review for possible downgrade to junk status, citing the takeover attempt’s potential impact on growth, policy making and Turkey’s ability to finance its external imbalances.
Stocks tumble
The lira surged as much as 3 per cent on Monday, before giving almost half of its gains back by 10:30pm in Istanbul. The benchmark Borsa Istanbul 100 Index for stocks, which had closed before the clashes began, dropped 7.1 percent, the most in three years. Yields on 10-year government bonds jumped 64 basis points, their biggest advance since 2013.
The currency’s slump and Turkey’s rising risk premium may force policy makers to maintain rates for now, but their inclination to cut remains in place, according to HSBC economist Melis Metiner.
"We would expect the easing cycle to resume if and when the lira stabilizes,” Metiner said in an e-mailed note. Her original call was for a 50 basis-point cut to the overnight lending rate.
The bank lowered the lending rate four times since March, bringing it to 9 per cent last month, while keeping the one-week repo and overnight borrowing measures unchanged. Last month’s cut took the bank’s so-called interest-rate corridor to its narrowest point since the system was introduced in 2010. Lower global volatility has diminished the need for a wider rates corridor, Cetinkaya said in April.
Clemens Grafe, a Moscow-based economist at Goldman Sachs who had initially forecast a half-point reduction, said the central bank may now hold its fire.
The events over the weekend may have reminded the governor "that a too-narrow interest rate corridor is undesirable as it restrains the bank’s policy space to react to shocks without resorting to emergency rate hikes,” Grafe wrote in an e-mailed report.
