Turkey’s first interest rate rise since 2021 was a “baby step” towards restoring investors’ faith in the country’s financial management, fund managers said. But they said they remained sceptical that President Recep Tayyip Erdoğan will allow the unorthodox policies that have triggered a years-long economic crisis to be fully unwound.
The central bank on Thursday hoisted its main interest rate to 15 per cent from 8.5 per cent, while pledging to tighten policy as much as needed as it attempts to bring down inflation that is running at almost 40 per cent.
The move marked the clearest sign yet that the economic team Erdoğan put in place after winning May’s election — led by finance minister Mehmet Şimşek and central bank governor Hafize Gaye Erkan — will use traditional economic tools to restore Turkey’s economy to a more sustainable path and try to lure back investors who have abandoned the market.
But the scale of the increase disappointed some investors and local market participants who had projected a rise to 20 per cent or even as high as 40 per cent. “It’s a baby step in the right direction, [but] my guess is it is probably not enough to change sentiment,” said Paul McNamara, an investment director at GAM in London.
Emre Akcakmak, a senior consultant at East Capital, a specialist emerging markets fund manager, added that “it was somewhat disappointing in the sense that it didn’t get the sense of urgency and decisiveness markets were looking for”.
The lira fell about 5 per cent to a record low beyond 24 to the US dollar after the decision while the cost to protect against a Turkish debt default ticked higher. Selling continued into Friday with the currency weakening beyond 25 for the first time, leaving it down around 26 per cent this year.
JPMorgan warned that it now expects inflation will end the year at 50 per cent, from its previous forecast of 45.5 per cent, saying “authorities revealed their preference for growth and employment over inflation ahead of March 2024 local elections”.
The bigger question than the size of the rise, investors said, was whether the more muted than expected move was a sign that Şimşek, a former deputy prime minister who is well regarded by investors, and Erkan, an ex-Goldman Sachs executive who specialises in risk management, will be given the latitude they need to put in place more robust economic policies.
With the current account deficit running at record levels, fuelled by a $36bn goods trade gap, a domestic economy that many analysts say is overheating, and a currency that is seen as overvalued despite a huge fall in recent years, the interventions Şimşek will need to undertake are expected to be painful in the short run.
“It’s not just the rate hike itself, but the market will sense that the limits of Şimşek’s mandate are becoming clear,” said Murat Gülkan, chief executive of OMG Capital Advisors in Istanbul, adding that “with municipal elections just around the corner the risk is . . . results fail to materialise, then political will suffers and Simsek’s autonomy could be questioned”.
Kieran Curtis, head of emerging markets local currency debt at fund manager Abrdn, said that “the big advantage with Şimşek is that there is someone back in the room who will put that [orthodox] case to Erdoğan”. But he said he was also nervous about how far Turkey’s central bank will be able to go in raising rates before Erdoğan changes his mind.
During Şimşek’s previous tenure as deputy prime minister and finance minister from 2009 to 2018, he “spent a lot of time talking to investors about what he wanted to do, and then he was never really allowed to do them”, Curtis said. In a sign of how Erdoğan can swiftly change course on policy, Naci Ağbal was fired just months into his tenure as central bank boss in early 2021 after sharply increasing borrowing costs.
Şimşek appeared to attempt to assuage market concerns after the central bank meeting on Thursday, pledging that Turkey will shift to a “rules-based” fiscal and monetary policy that would focus on “sustainable” economic growth. He also said that the country would move to a “free foreign currency regime”.
The promises are important because one of the centrepieces of Erdoğan’s economic policies has been regulations and other measures that have made it increasingly difficult for consumers and businesses to trade and hold foreign currency. The central bank has also burnt through at least $24bn this year in an attempt to defend the lira, a move that has left the country’s foreign currency war chest depleted.
McNamara said that beyond raising the bank’s policy rate, it would be important to see Turkey step back from currency interventions and also take more decisive steps away from the credit-fuelled growth that has led to big imbalances in Turkey’s economy.
“It is fair to say we’re not piling into Turkish assets right now.”
Source: Economy - ft.com
