Central bank needs to raise rates - columnist

Turkey’s central bank will need to raise interest rates, and the longer it waits, the bigger the move will have to be, said Erdal Sağlam, a columnist at Hürriyet newspaper.

Turkey is the most vulnerable country of five weak emerging market economies that also include Pakistan, Argentina, Qatar and Egypt, Sağlam said, citing a report by ratings agency Standard & Poor’s. High inflation, along with an unbalanced economy and political risks, means Turkey has entered a period where pressure on the country and the lira will increase, he said.

Turkey’s inflation rate has surged to 11.9 percent after the lira fell 18 percent against the dollar over the past 12 months, causing the price of imported goods and services to jump. President Recep Tayyip Erdoğan, who asserts that high interest rates are a cause of inflation, has sought to boost the economy through government-backed loan incentives ahead of presidential elections, due 2019 at the latest. He has also been embroiled in spats with Germany and the U.S., which have put further pressure on the lira.

There is a dominant view in the markets that indirect measures will not be enough. Analysts are saying – while the central bank is trying to give the message with the measures that “I am here” – that the market is expecting a suitable increase in rates to put the brakes on the currency. The central bank may use a few indirect measures it has left, but analysts are saying that they don’t expect them to have much of an effect.

In an effort to arrest losses for the lira, the bank said on Nov. 6 that it would withdraw 5.3 billion lira ($1.4 billion) of lira liquidity from the market and provide $1.4 billion of dollar liquidity to the nation’s banks in a revision to reserve requirements. The lira has gained to 3.84 per dollar from 3.88 per dollar since the move.

The U.S. signalled that a diplomatic crisis with Turkey might be abating on Nov. 3 when it resumed processing visas at its missions in the country. Ankara and Washington mutually suspended all non-immigrant visa services on Oct. 8 after Turkey arrested a U.S. consulate employee, sharply escalating tension between the two NATO allies.

A Dec. 7–8 summit between senior bureaucrats at the European Commission, the European Union’s executive arm, and Turkey will show ties are improving, Deputy Prime Minister Mehmet Şimşek said this week.

In its decision, the central bank also set rediscount rates for foreign exchange earning services and exports due by Feb. 1 at 3.7 lira per dollar and 4.3 for euros. Those payments total about $5 billion.

To read the full article in Turkish