Investors hope for a strong rate hike

Lira

With the appointment of a new central bank governor, the problems of the Turkish currency are not over yet.


(Photo: Reuters)

Istanbul After the turbulence of the past few weeks, all eyes will be on the Turkish central bank tomorrow, Thursday. The meeting, eagerly awaited in the markets, will be chaired by the new boss Naci Agbal. And that could start with a sharp rise in interest rates to lead the country out of the crisis – and to demonstrate its own independence.

Analysts polled by Bloomberg expect the central bank to raise the key rate by 4.75 points to 15 percent. Then it would be well above inflation, which was 11.75 percent in September. For foreign investors, the country could become more attractive again with higher interest rates.

Because what counts for them is how high the real interest rate, adjusted for inflation, is compared to other currency areas. The Turkish lira has lost a third of its value since the beginning of the year. In early November, it hit an all-time low of 8.52 lira per dollar.

This is fueling local prices and accelerating poverty in the population amid the turmoil of the corona crisis. The downward spiral has been in full swing for months.

But President Recep Tayyip Erdogan reaffirmed his very own line on Wednesday: Speaking to leading business representatives, he said that investors should not be “crushed” by higher interest rates. Turkey should concentrate economically on exports, production and jobs.

At the same time, Erdogan emphasized that the fight against inflation had top priority. Turkey will maintain price and budget discipline. In the past few months he had repeatedly stated that the high inflation in Turkey was a result of the central bank’s excessively high key interest rates – a thesis that experts disagree.

The lira has been put on a roller coaster ride by recent statements by the president. The speech on interest rates hurt the currency, while comments on inflation gave it a boost. The nervousness before the meeting on Thursday is great.

Dollar reserves have melted

In the course of the first wave of corona infections in the spring, the government countered the economic consequences of the global lockdown policy with a massive loan-financed rescue program. Although this stabilized the domestic economy, it did not help the currency.

At the same time, the then finance minister Berat Albayrak used the reserves of the central bank to counter the decline of the Turkish currency. He was selling dollar reserves. They have now melted, but the decline in the lira could not be stopped.

In interviews, Albayrak had stated that the US dollar did not play a role in the Turkish economy. Turkish companies alone are sitting on more than US $ 200 billion in foreign debts.

Only recently was a chair moved to the decisive post: At the beginning of November Erdogan initially deposed the previous central bank chief Uysal. A day later, Finance Minister Albayrak announced his resignation. Lutfi Elvan, the country’s former transport and development minister, has now replaced him.

It remains to be seen whether Turkey will actually open a new chapter in its economic policy. The new finance minister Elvan announced structural reforms this week to improve the environment for international and domestic entrepreneurs. He expects gross domestic product to grow by 0.3 percent by the end of the year.

So far, the Turkish economy has done surprisingly well in the pandemic year. Most Turkish companies published figures for the past third quarter that exceeded analysts’ expectations. Some corporations like Turk Telekom or Coca Cola Türkiye were even able to repay longstanding debts.

Equity investors have rediscovered Turkey too. After years of outflow, international investors are now bringing money back into the country. The MSCI Turkey ETF from iShares, the largest fund focusing on individual Turkish stocks, has seen inflows for five weeks. Overall, the fund grew by 36.9 million to 255 million US dollars during this time.

One thing is clear: the expectations of the central bank are high. The most important thing for Turkish stocks now is “to take the necessary steps,” says Haydar Acun, managing partner of Marmara Capital, the financial news agency Bloomberg.

And what the “necessary steps” are everyone in the Turkish banking district of Levent is currently talking about: gaining the trust of foreign investors and supporting the independence of the central bank.

More: Why Erdogan is now relying on a strong lira

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