Turkish markets in moment of truth – Bloomberg

Turkish markets face a moment of truth as the central bank decides whether to raise rates for the second time in a month at a meeting on Thursday, Bloomberg reported citing Morgan Stanley.

The central bank is expected to hike rates by 75 basis points to 17.25 percent then raise by a further 75 basis points in the fourth quarter of the year to tame inflation, along with government measures to tighten fiscal policy after June 24 elections, Morgan Stanley’s Ercan Erguzel said.

Turkey’s central bank is under pressure to prove its independence after it failed to act to stem losses in the lira last month until concern grew about a possible currency crisis. Turkish President Recep Tayyip Erdogan prompted the latest slide in the currency after he told investors in London that he would take a more active role in monetary policy and lower interest rates after the elections.

“May price data and ongoing credibility problems call for further tightening,” said Yarkin Cebeci of JPMorgan Case & Co., according to Bloomberg. ““Although the government seems to be more vocal about the determination to take the necessary steps to bring inflation down, the sharp lira weakening and the worsening in inflation expectations have done significant damage to price dynamics.”

Inflation in Turkey climbed to 12.2 percent last month, four times the emerging-market average, from 10.9 percent in April. Inflation is expected to accelerate in the coming months, according to economists. Turkey has the highest interest rates in major emerging markets after Argentina.

“Even if we assume that the lira will appreciate from here on, the impact of this surge on CPI will take several months to materialize and will probably drive core inflation into the 15 percent range before things stabilize,” said Tatha Ghose of Commerzbank.

“The real interest rate has to be significantly positive after assuming 15 percent inflation. Minor policy tweaks will not work. Can the central bank deliver on June 7 irrespective of upcoming elections? And can we depend on the incoming administration to respect the central bank’s decision? These are the big questions the market will soon ask.”

The lira slumped to a record low of 4.92 per dollar last month before the central bank intervened, raising rates by 300 basis points to 16.5 percent. The currency, swinging markedly between gains and losses over the past few days, fell 0.4 percent to 4.5742 at 9:55 a.m. in Istanbul on Thursday.

Inflation is expected to end the year at 13 percent and won’t slow to single digits until towards the end of 2019, Clemens Grafe of Goldman Sachs said, according to Bloomberg.