Turkey: Central bank rates decision critical for growth

By Andrew Jay Rosenbaum

ANKARA

The interest rate decision due on Tuesday from Turkey’s central bank will have special importance for the country’s future economic growth, analysts say.

Coming after the U.S. Federal Reserve rate hike on Dec. 16, the decision is forecast to position the Turkish economy for future development.

“This is unquestionably a key and dramatic moment for the Turkish Central Bank,” Christopher Dembik, an economist with Saxo Bank in Paris told Anadolu Agency on Tuesday.

“Economic growth will depend on the careful direction of monetary policy,” Dembik added.

Many economists believe that, nonetheless, the bank will hold rates at their current levels of 7.50 for the one week repo, and 10.75 for the overnight lending rate.

“Let’s see what the Turkish Central Bank does,” warned Timothy Ash, credit strategist at investment bank Nomura in London.

Ash thinks the bank might not move, but that a rate hike would be favorable, according to a note published on Monday.

But a considerable number of analysts, pointing to rising inflation in Turkey, say that a hike should be expected.

“In Turkey and South Africa we think central banks will have to raise interest rates more aggressively than most currently anticipate to get inflation under control,” Neil Shearing, chief emerging markets economist at Capital Economics said in a note published on Monday.

The central bank had in August announced a roadmap to a simplification of its monetary policy, meaning that there will be a convergence between the one week repo rate and the overnight lending rate.

“Today may mark the beginning of the simplification process,” wrote Bora Tamer Yilmaz, in a note published on Tuesday.

“We think that we will end up with a single policy rate at the end of simplification process, merging the overnight rate and the one week repo rate. What we do not know is how we will get there and in what time frame,” Yilmaz said.

Yilmaz predicted that a one-week repo rate – the lower band of the so-called ‘corridor –‘ hike is possible, which would have the effect of bringing the two key rates together.

“This will cause the Turkish lira to strengthen against both the dollar and the euro,” according to Yilmaz.

Or, Yilmaz continues, the central bank could reduce the overnight rate – the upper band of the ‘corridor.

“That would be the surprise case for the market. The Turkish lira would sell off, dropping to about 2.96 to the dollar. That may serve as a selling opportunity,” Yilmaz said.

The Turkish lira has performed better than most emerging-market currencies since the Federal Reserve raised its key rate for the dollar to the range of 0.25 to 0.50 percent.

The lira has fallen from about 2.96 to about 2.91 to the dollar since the Fed made its move, trading on Tuesday morning at about 2.91 to the U.S. currency.

Ash noted that the Turkish economy is performing well, and so there would be a basis for the bank to hold rates.

“I would be a buyer of Turkey in terms of the micro story – much more entrepreneurial business culture, and diversified trade, plus favorable demographics and a strong banking sector,” he said.