Turkey’s lira eases as investors pause before critical central bank meeting

 23 Jan 2017 - 18:14

Turkey’s lira eases as investors pause before critical central bank meeting

By Nevzat Devranoglu and David Dolan / Reuters

ISTANBUL: Turkey’s lira weakened on Monday as comments from a deputy premier reaffirming the central bank’s independence failed to bolster confidence, a day before a policy meeting seen as a big credibility test in the face of a tumbling currency.

The lira has fallen some 8 percent so far this year, on top of double-digit declines in both 2015 and 2016. Investors have been shaken by the fall-out from last year’s failed military coup and worries the central bank is less than independent.

President Tayyip Erdogan wants cheap credit to spur a flagging economy and has described himself as an “enemy” of interest rates. Recent efforts by the bank to shore up the lira by tightening liquidity have reinforced fears among investors that it wants to avoid an outright rate hike.

“The central bank is an independent institution. There are many instruments the central bank can use,” Deputy Prime Minister Numan Kurtlumas told a news conference in Ankara.

“We, as the government, can voice our views within the framework of our own main policy and wait for the central bank’s decision. We are also awaiting the decision it will make tomorrow.”

The lira was at 3.7803 to the dollar at 1426 GMT on Monday, down from its close of 3.7640 on Friday, when it firmed 1.6 percent.

Fifteen of 18 economists polled by Reuters expect the central bank to raise its benchmark repo rate on Tuesday, with nine of them forecasting an increase of 50 basis points. But it may take a lot more to support the currency. UBS said last week that increases of 200 basis points may be necessary to anchor the currency in the next month or two.

“As is always the case with Turkey’s central bank the issue is not what it should do, but whether it has the resolve to face down Turkey’s politicians and tighten policy aggressively,” said Nicholas Spiro, a partner at Lauressa Advisory in London.

“COVERT TIGHTENING”

So far, the central bank has relied on a series of liquidity measures - what analysts are calling “covert rate hikes” - in an attempt to shore up the currency. But the moves have yet to turn the tide for the lira.

The central bank has closed off some of its funding taps, forcing banks to borrow from its costlier “late liquidity window” to drive up borrowing costs.

“The central bank will hike rates more gradually than the markets expect, and it has indicated that it prefers liquidity management rather than emergency rate hikes to fend off pressure that it sees as more transitory,” Goldman Sachs said in a note.

Erdogan has characterised the sell-off in the lira as an attack on the economy, likening it to the abortive coup in July.

Since then, more than 100,000 people have been sacked or suspended from the police, civil service or private sector on suspicion of supporting the coup.

“Even if the (central bank) were to tighten monetary policy until the pips squeak, the lira would still remain under pressure,” said Lauressa’s Spiro. “It’s the entire investment case for Turkey that’s being questioned now.”

(Additional reporting by Tuvan Gumrukcu; Editing by Daren Butler/Mark Heinrich)