A revamped lineup of Turkish central bankers is meeting for the first time on Thursday, setting up a decision that will look to dispel doubts in the market and could ensure the pace of interest-rate increases doesn’t slow again.
(Bloomberg) — A revamped lineup of Turkish central bankers is meeting for the first time on Thursday, setting up a decision that will look to dispel doubts in the market and could ensure the pace of interest-rate increases doesn’t slow again.
Although the new governor, Hafize Gaye Erkan, has been in charge for over two months, it wasn’t until the end of July that three new members joined her on the seven-seat Monetary Policy Committee. The appointments likely swing the balance on the decision-making body in favor of a more conventional policy bias.
With the outlook for inflation becoming dire again, the central bank will probably opt to match or even outdo the extent to which the previous MPC tightened policy last month, according to economists surveyed by Bloomberg.
The majority of analysts predict a second straight increase of 250 basis points to 20%, which would still leave the benchmark nearly 30 percentage points below July’s annual inflation.
Erkan has brought to a close the era of cheap money that President Recep Tayyip Erdogan favored as a way of powering investment and exports. But the two rate hikes under her stewardship both fell far short of expectations, with the focus increasingly turning toward backdoor tightening using the central bank’s alternative tools.
Besides picking Erkan, who previously had long stints in the US at Goldman Sachs Group Inc. and First Republic Bank, Erdogan also appointed former Merrill Lynch bond strategist Mehmet Simsek as finance minister in June.
Among the new members to join the MPC are a former adviser to the Federal Reserve Bank of New York and the former chief economist at one of Turkey’s biggest private lenders. Two seats on the MPC still remain vacant, with another member staying on after the reshuffle.
What Bloomberg Economics Says…
“The central bank’s three new deputy governors, all appointed since the last policy meeting, are likely to be a part of the post-elections credibility-building exercise we predicted at the institution. We do not expect the MPC to renege on its recent communication for a gradual rate hike cycle following these appointments. But in our view, the overhaul may deliver fast changes to the central bank’s complex set of regulations and practices.”
— Selva Bahar Baziki, economist. Click here to read more.
While the president has long meddled in monetary policy, Erdogan appears to have dialed back his interventions after reelection in May, promising earlier this week to lower inflation into single digits.
“Our citizens should rest at ease,” he said. “Our economy cadres are competent.”
It isn’t yet clear if the arrival of more like-minded colleagues will change Erkan’s commitment to what she’s described as only a “gradual” cycle of monetary tightening.
The approach holds significant risks for the credibility of the central bank, however, especially after it sharply raised inflation forecasts. Price growth is already running at nearly 50% in annual terms.
Erkan said last month that inflation won’t peak until the second quarter of next year, but showed little willingness to raise policy rates into more restrictive territory.
With the pace of hikes slowing sharply from a 650 basis-point step in June, the preference has been for a more roundabout route to raising the cost of money.
The latest regulation from the central bank took aim at a government-backed savings program, telling lenders to discourage lira depositors from renewing their foreign-exchange protected accounts.
Read more: Lira Lifeline Became $124 Billion Problem That Haunts Turkey
The new rules amount to a “stealth rate hike” and follow an earlier decision to raise reserve requirements that could mean an additional 40 basis points of tightening, according to Bloomberg Economics.
The approach may push up deposit rates but also creates risks along the way, according to Goldman Sachs.
“While the new measures will likely lead to higher rates on lira deposits with the gap between deposit rates and the policy rate widening again, there is a risk of renewed dollarization or funds being withdrawn,” Goldman analysts Clemens Grafe and Basak Edizgil said in a report.
–With assistance from Joel Rinneby.
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