Turkey to avoid big rate hike on economy concerns – Reuters

Turkey’s central bank will avoid a big hike in interest rates when it meets on Thursday due to concern about shrinking economic growth.

The bank in Ankara may raise the benchmark one-week repo rate by 325 basis points to 21 percent, Reuters reported on Wednesday, citing a poll of 11 economists. All expected an increase, but predictions ranged from 225 basis points to 725 basis points, the news wire's Ali Kucukgocmen and Nevzat Devranoglu said..

Central bank policymakers have kept the benchmark rate of 17.75 percent on hold since June 24 elections, after which President Recep Tayyip Erdogan increased his grip on the economy by appointing his son-in-law to head the treasury and finance ministry.

Turkish economic growth slowed to an annual 5.2 percent in the second quarter from 7.3 percent in the first three months, according to data published on Monday. Most economists are now expecting a quarter-on-quarter contraction or recession to begin after the lira slumped about 40 percent against the U.S. dollar this year.

"Although this amount of monetary tightening may disappoint market expectations and spark renewed TRY weakness, the decision would reflect the prioritisation of Turkish authorities' concerns regarding a rapidly decelerating economy," said Phoenix Kalen, strategist at Societe Generale, who forecast a 300 basis-point increase and the benchmark rate being restored as the main policy instrument.

The effective funding rate is currently 19.25 percent, because the central bank lends to financial institutions at varying rates of interest.

"The central bank has a complete lack of credibility," said Guillaume Tresca, senior EM strategist at Credit Agricole, commenting on why the range of predictions varied so much between economists. "We know they are not independent and that is it. So, you cannot predict what they will do, what you are trying to do is to predict what President Erdogan will do.”

The central bank last raised rates by 1.25 percentage points in June. In August, it moved funding from repo auctions to the upper band of its interest rate corridor - thereby raising the cost of funding again by 150 basis points.

Veteran emerging-markets investor Mark Mobius said rate increases may not be effective, Reuters reported.

"I'm not convinced that raising interest rates is going to do anything, it’s all about confidence," he said. "OK, they raised interest rates, but what happens? People then say 'you're not confident. You're not confident in your own currency therefore you're offering us some crazy interest rates'.”