Bullish investors may spoil Turkish rate hike – Bloomberg

A rally in the lira following higher Turkish inflation in May was fueled by anticipation that the central bank will increase interest rates, but the stronger currency may now mean that it doesn’t hike at all, Bloomberg’s Constantine Courcoulas said.

The bets on the lira by some investors may be provoking a self-defeating rally, Courcoulas said in an analysis on Tuesday. The stronger lira means the central bank could be less inclined to raise rates at its regular meeting on Thursday, he said.

Six out of 11 analysts surveyed by Bloomberg expect no hike at all, while the other five believe that the bank will increase its benchmark rate of 16.5 percent by 50 basis points or more.

“If a critical mass of investors buy the lira on the expectation of a hike, the resulting lira rally makes the hike less likely,” said Inan Demir, an economist at Nomura in London, according to Bloomberg.

Demir expects a 100-basis point increase, but doesn’t have a high conviction about the call, Courcouras said. Many investors are concerned that pledges by Turkey to raise rates again, following a 300 basis-point increase in May, could jut be “a general affirmation rather than a clear statement of intent”, he said.

Turkish inflation accelerated to 12.2 percent last month from 10.9 percent in April, just below a 14-year high reached in November. The lira has rallied after the data, which was published on Monday.

The central bank raised rates in May by 300 basis points after the lira slipped to a record low of 4.92 per dollar, raising concern for a full-blown currency crisis. The lira weakened 0.3 percent to 4.065 per dollar early on Tuesday.