Turkish removal of hawkish rate pledge worsens lira’s plight

Istanbul

Turkey’s central bank dropped a commitment to deliver further monetary tightening if needed as it extended its interest-rate pause to seven months. The lira tumbled to its weakest since October.

The Monetary Policy Committee led by Governor Murat Cetinkaya tweaked its forward guidance in a statement accompanying its decision on Thursday, saying its action “will be determined to keep inflation in line with the targeted path.” The MPC kept the benchmark rate at 24 per cent, in line with forecasts.

Investors interpreted the change in language as a dovish turn by the central bank. The lira depreciated as much as 1.5 per cent and traded 1.3 per cent lower at 5.9512 per dollar at 2:46pm in Istanbul.

“This is much worse than expected and supports the view that policy has gone off the rails,” said Win Thin, the global head of currency strategy at Brown Brothers Harriman & Co. “This signals that any orthodoxy at the central bank has effectively been crushed, since no sane central bank would be leaning dovish at a time like this for Turkey.”

Cetinkaya has pledged to wait for a “convincing” inflation slowdown before cutting rates, but has been stymied by the weaker lira. Investors have soured on Turkey’s currency as the central bank struggled to explain moves in its reserves, fuelling concern about the state of the nation’s finances.

The lira is down over 6 per cent so far this month against the dollar in the worst performance globally.

“The challenging economic environment is compounded by poor policy and tone-deaf statements,” Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said by email. “The risk is that the central bank is forced to hike rates again as the pass-through from the weaker lira prevents stabilisation.”

“The central bank turned less hawkish. Still, given the increasing political and economic risks in Turkey, we don’t expect it to start cutting rates until the second half.”

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Price pressures abound as inflation still hovers at nearly four times the official target of 5 per cent, despite the economy entering its first recession in a decade last year.

The downturn, coupled with a run-up in food prices and the highest unemployment since 2009, undermined support for President Recep Tayyip Erdogan, whose party suffered unexpected losses in Turkey’s major cities in March 31 municipal elections. Tensions have been high since then as the ruling AK Party is contesting its defeat in commercial hub Istanbul, claiming widespread irregularities and demanding a new vote.

“Turkey needs to keep a tough stance and not ‘give in’ to another short-term credit boost in order to come out of the recession, however tempting that politically may be after the local elections,” said Morten Lund, analyst at Nordea Bank AB.

Despite swirling speculation around the health of Turkey’s international reserves and a mix of risks from geopolitics to oil, the central bank restarted one-week repo auctions this month, effectively reversing a surprise monetary tightening it used to steady the lira before last month’s election.

“Clearly the market is disappointed,” said Piotr Matys, a London-based analyst at Rabobank. “It seems that the central bank completely overlooked recent lira’s depreciation and instead of strengthening its hawkish message to provide the battered currency with some support, the overall message embedded in the statement is less hawkish compared to March.