Turkey central bank's next move is anyone's guess â" and that leaves lira vulnerable
Ahead of Turkeyâs central bank policy update on Thursday, market participants canât find a consensus on what the central bank will do to stem Ankaraâs currency crisis.
The Central Bank of the Republic of Turkey has been in focus as investors wonder what turn the currency crisis could take. For starters, the Recep ErdoÄan administration has been critical of the bank pushing up interest rates, even though market participants believe such a move could stabilize the liraâs USDTRY, +0.1939% steep drop.
Check out: Strategists see 4 ways out of Turkeyâs currency crisis
âAlthough the median forecast for tomorrowâs CBRT announcement is a 325 basis point hike [of the one-week repo rate] to 21%, it would be wrong to call this a âconsensus,â as analystsâ forecasts are so widely dispersed, ranging from unchanged rates to a 725 basis point hike to 25%,â wrote Adam Cole, chief currency strategist at RBC.
The average forecast of a 345 basis point hike is higher than the median of 325 basis points, âsuggesting that forecasts are skewed to the upside, but the lesson of history is that the CBRT builds expectations and then under delivers and that is where we see the risk,â said Cole.
Also in focus, and perhaps more important than the one-week repo rate, according to some analysts, is whether policymakers might change the overnight lending rate. Currently at 19.25%, the overnight rate has become the Turkish financial systemâs effective go-to funding mechanism as the currency crisis unraveled this summer.
Unchanged rates or a small hike that would be interpreted as too little, too late by the market would deepen the lira selloff, according to Cole.
The Turkish lira has dropped more than 40% against the U.S. dollar in the year so far, according to FactSet. The currency crisis was stoked by Turkeyâs high reliance on foreign â" mostly U.S. dollar-denominated â" funding, rising interest rates in the U.S. that make borrowi ng for emerging markets nations more expensive and diplomatic spats. On the back of that, the Central Bank of the Republic of Turkey has been under scrutiny for months, as its actions have been judged as insufficient by many market participants.
With rampant double-digit inflation â" last at 17.9% on an annualized basis in August â" and little central bank intervention, the crisis keeps spiralling out of control. Making matters worse, Turkey has been hit by U.S. trade tariffs but is also embroiled in a diplomatic spat over the detention of a U.S. pastor in Turkey.
See: How the lira selloff compares to Turkeyâs previous crises
Erdogan has been an outspoken critic of higher interest rates, which could combat the liraâs tumble. And since Erdogan was re-elected in June, his presidential powers have become more extensive, leading investors to worry about the CBRTâs independence.
When the bank left rates unchanged in July, which was seen as a litmus test of its independence under the new Erdogan administration, the lira sold off further.
On Wednesday, the Turkish currency strengthened against a buck that was weaker across the board. One dollar last bought 6.3712 lira, down from 6.4302 late Tuesday in New York.
Read: Turkeyâs woes wonât trigger a full-blown crisis across emerging markets, economist says
Also see: South Africaâs unexpected recession adds to downbeat emerging-markets backdrop
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