Turkey said to be ready to hike rates if May inflation rises

A money changer counts Turkish lira banknotes at a currency exchange office in Diyarbakir, Turkey (file). Uncertainty over how policy makers will respond to inflation has weighed on the currency.

Turkey is prepared to raise interest rates again if inflation accelerates, according to two money managers who met with Turkey’s central bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek in London on Tuesday.  Further tightening will depend on May inflation data to be released today and the nation won’t resort to introducing capital controls, the people cited the officials as saying. They asked not to be identified because the meetings were private.

The lira fell as much as 2.7% on Friday, the worst performance among global currencies, to 4.6465 per dollar. The yield on 10-year notes jumped 42 basis points to 14.73%, taking an increase since Tuesday to more than 70 basis points. Uncertainty over how policy makers will respond to inflation also weighed on the lira. Data due today will show consumer-price increases quickened to 12.15% in May, according to the median estimate in a Bloomberg survey, approaching a 14-year high of 13% reached last year.

The meetings come as part of a charm offensive by Turkish officials, after the nation’s double-digit inflation and twin deficits put the lira at the centre of an emerging-market selloff, setting it on course for its worst month in about a decade. In less than a week, the central bank boosted borrowing costs by 300 basis points at an emergency meeting and announced it will revamp its interest-rate system as the nation attempts to stem a run on its currency.

“Inflation is widely expected to accelerate,” said Win Thin, the New York-based head of emerging-markets strategy at Brown Brothers Harriman & Co. “Personally, I think they should hike again on June 7. If they don’t, then they lose credibility after that story. Another 300 basis points would be a strong statement.” The Turkish central bank couldn’t be reached for a comment by phone or email outside of regular business hours on Tuesday. Simsek’s office couldn’t be reached by phone for comment outside of regular working hours.

The lira has weakened about 4% since Erdogan said in a Bloomberg TV interview that he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins the country’s June 24 election. “Given that a semblance of calm has descended on markets over the past week, we think the central bank will refrain from raising interest rates further at this meeting,” Jason Tuvey, an emerging-market economist at Capital Economics, wrote in a note to clients. While the lira’s recent rally may have a bit further to run, it will weaken again toward the end of the year and further in 2019 and 2020, he said.

Sources and photo-credits: Bloomberg, Gulf Times