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Turkey’s first rate hike since 2021 was a “baby step” to restore investor confidence in the country’s fiscal management, fund managers said. But they said they remained skeptical about whether President Recep Tayyip Erdogan would allow a complete reversal of the unusual policies that caused the long-running economic crisis.
The central bank on Thursday raised the key rate to 15% from 8.5% while pledging to tighten policy as long as necessary to bring down inflation, which has hovered near 40%.
The move will see the economic team set up by President Erdogan after his election victory in May (led by Finance Minister Mehmed Simshek and Central Bank Governor Hafize Gay Ercan) use traditional economic instruments to make Turkey’s economy more sustainable. It’s the clearest sign yet of trying to get back on track where possible. This is to attract investors who have left the market.
However, some investors and local market participants, who expected a 20% or even as high as 40% rise, were disappointed by the rise. “This is a small step in the right direction. [but] Probably not enough to change sentiment,” said Paul McNamara, investment director at GAM in London.
“It was a little disappointing in the sense that we didn’t get the urgency and decisiveness that the market was looking for,” said Emre Akkamak, a senior consultant at emerging markets fund manager East Capital.
The lira fell about 5% after the decision, hitting a record low above 24 lira to the dollar, while the cost of protecting against a default by Turkey rose. Selling continued through Friday, with the currency depreciating above $25 for the first time, down about 26% since the start of the year.
JPMorgan warned that it expects year-end inflation to be 50%, up from a previous forecast of 45.5%, warning that “regulators will prioritize growth and jobs over inflation ahead of local elections in March 2024.” I made it clear what I was doing,” he said.
Investors said the bigger question than the size of the rise was the more modest move than expected, which investors praised former Deputy Prime Minister Simshek and former Goldman Sachs executive Elkann, who is a specialist. It is said whether it is a manifestation of Mr.’s speculation. Risk management will be given the necessary freedom to introduce stronger economic policies.
The current account deficit is at a record high, fueling a $36 billion goods trade gap, a domestic economy many analysts say is overheating, and an overvalued economy despite its sharp decline in recent years. Simsek will need to intervene given the currency that is believed to be under attack. Expect pain in the short term.
“The market will feel that the limits of Simsek’s mandate are becoming apparent, beyond just the rate hike itself,” said Murat Gülkan, chief executive of OMG Capital Advisors in Istanbul. is imminent and the risks are increasing,” he added. teeth . . . Failure to deliver results could undermine political will and call Simsek’s autonomy into question. “
“The big advantage for Simshek is that he has someone in the room again to do it,” said Kieran Curtis, fund manager and head of emerging market local currency bonds at Abledon. [orthodox] A lawsuit against Erdogan. But he said he was also worried about how far Turkey’s central bank could raise rates before Erdogan changed his mind.
Between 2009 and 2018, when Simsek was deputy prime minister and finance minister, “I spent a lot of time talking to investors about what I wanted to do, but they weren’t really allowed to do that,” Curtis said. said Mr. In a sign of how quickly Erdogan can change course, Nasi Agbar was sacked in early 2021, just months after taking office as central bank governor, citing soaring borrowing costs.
Prime Minister Simsek appeared to try to ease market concerns after Thursday’s central bank meeting, pledging Turkey to move to a “rules-based” fiscal and monetary policy focused on “sustainable” economic growth. He also said the country would move to a “free foreign exchange regime”.
The pledge is important because one of Erdogan’s economic policies has been the regulation and other measures that make it increasingly difficult for consumers and businesses to trade and hold foreign currency. The central bank has also used up at least $24 billion this year to protect the lira, a move that has drained the country’s foreign currency reserves.
McNamara said it was important not only to raise the central bank’s policy rate, but also for Turkey to withdraw from currency intervention and take a more decisive step from the credit-driven growth that has caused huge imbalances in the Turkish economy.
“It is safe to say that we are not accumulating Turkish assets at this time.”
