Sep 10 2018

Turkey’s crisis-hit economy doesn’t need a rate hike – FT

Turkey’s economy doesn’t need a rate hike because the country is already experiencing a credit crunch and the current account deficit may now be reversing into a surplus, Colby Smith wrote in the Financial Times.

Smith wished investors “good luck” in telling President Recep Tayyip Erdoğan that the central bank needs to hike rates to shore up investor confidence at a meeting this week, because interest rate hikes will only add to the country’s economic malaise.

The plunge in the lira this year, totaling about 40 percent is “grinding domestic activity”, Smith, who was previously Marjorie Deane Fellow at the Economist, said in an analysis for FT Alphville, citing data from the Institute of International Finance (IIF).

“When currencies depreciate as dramatically as the lira has, two things tend to happen: real GDP falls sharply and the current account deficit swings to a surplus,” she said.

Turkey’s central bank will meet on Thursday to decide on whether to raise its benchmark interest rate. Inflation in the country stands at 17.9 percent, above the bank’s main rate. It has already hinted that rate hikes are in the works. But Erdoğan, who has sought to wield more control over monetary policy, has frequently stated his opposition to higher rates, saying they are inflationary and a weapon of the West to keep Turkey down.

On Monday, the government published economic growth data that showed an expansion slowing to 5.2 percent annually and just 0.9 percent quarter-on-quarter. The lira fell 23 percent in the first half of the year, before diving further, particularly in August. The currency’s slide is having a serious impact on domestic demand, so much so that most economists are now predicting an economic contraction starting as early as the third quarter.

“At the last meeting in July, the central bank resisted calls for higher rates and stood firm at 17.75 per cent, leading the lira to collapse,” Smith said. “At the time, Turkey’s economy needed higher rates. Today, it does not. A rate hike this week serves no other purpose than to shore up investor confidence.”

But many analysts disagree, Smith said.

“Turkey's central bank needs to do everything possible to keep the currency stable,” said Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London. “If they can do that, they've got a chance to get out of this without an IMF programme or capital controls.”