“Very credibility” of Turkish central bank at stake as MPC meeting approaches

“Very credibility” of Turkish central bank at stake as MPC meeting approaches
The credibility of Turkey's monetary policy is being put through the "naked emperor" test by the markets.
By bne IntelliNews June 4, 2018

The “very credibility” of the Turkish central bank and “monetary policy more generally in Turkey” are now at stake as the country awaits its next monetary policy committee (MPC) meeting, scheduled for June 7, an analyst said on June 4.

Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, reacted after latest inflation data showed Turkey’s consumer prices jumped a higher-than-forecast 1.62% in May, driving expectations that the Central Bank of the Republic of Turkey (CBRT) will push up interest rates once again at the MPC meeting, following the 300-basis point rise it introduced as an emergency measure on May 23.

“The market [is] interpreting this number as so bad, it is actually good in that it will leave the CBRT very little wiggle room at its next MPC meeting now not to hike again,” said Ash in a note.

“This is no longer about rates, but the very credibility of the CBRT and monetary policy more generally in Turkey after the incredibly damaging comments by [President Recep Tayyip] Erdogan in London earlier last month,” he added.

Economic populist Erdogan on May 15 gave an interview in which he openly advanced his unorthodox theory that higher interest rates cause inflation to rise and said that if elected Turkey’s first executive president on June 24 he would have a duty to be at the monetary policy helm. Many analysts feel that it is pressure from Erdogan that has kept the CBRT behind the monetary curve and that the strengthening of the embattled Turkish lira (TRY) in the wake of the emergency hike has been contained by nervousness among investors about what Erdogan might do in the area of monetary policy should he be re-elected and awarded sweeping powers under the constitutional changes last year narrowly officially approved in a referendum.

After the inflation data release, the lira clawed back to below 4.6 against the dollar from 4.6563 at the close before the weekend. By around 18:00 Istanbul time it stood at 4.5973. In the year to date, it has weakened by around 18% versus the USD.

In a Reuters poll, analysts had forecast the consumer price index (CPI) would climb 1.45% month-on-month. The official data showed the CPI at 12.15% y/y compared to 10.85 y/y in April.

Deputy Prime Minister Mehmet Simsek, who is charge of the government’s economic team and who has lately been trying to reassure investors almost on a daily basis about the state of Turkey’s economy and economic management following Erdogan’s monetary policy remarks, said on Twitter: “In the short term the inflation rise may continue due to base effects, but a falling trend will begin in the second half of the year with coordinated monetary and fiscal policy measures,”.

Is Investment economist Muammer Komurcuoglu told Reuters the rise in core inflation would impact pricing behaviour negatively. “Taking into account signals that the course of monetary policy will be closely linked to inflation, we think the central bank will go for a 100 basis point hike in its policy rate at its meeting this week,” Komurcuoglu said.

In another blow to market sentiment towards the Turkish economy, late on June 1 ratings agency Moody’s Investor Services placed Turkey’s sovereign ‘Ba2’ ratings on review for a downgrade, while Fitch Ratings switched Turkish banks’ ratings to Rating Watch negative.

May 4 also saw the yield on Turkey’s benchmark 10-year bond rise to 14.85% from 14.47% at the close on June 1.