Turkish assets hold steady ahead of critical Central Bank meeting

ANKARA - Reuters

HÜRRİYET photo

Turkish stocks firmed on Dec. 21 and the Turkish Lira moved sideways ahead of a crucial interest rate decision that could help the Central Bank shake off fears about interference in monetary policy.

The U.S. Federal Reserve’s decision last week to hike rates is widely expected to nudge Turkey’s Central Bank into following suit at its meeting on Dec. 22. It has kept rates on hold for the past nine months despite a plunging lira and above-target inflation.

Many investors worry that the Central Bank has failed to move due to pressure from senior political authorities, who have repeatedly called for rate cuts and equated high rates with “treason.” 

Concerns about political meddling in policy - as well as security worries - have helped push the lira to a series of record lows.

In dollar terms, the blue-chip stock BIST 30 is down by nearly a third this year, making it the third-worst performer among 30 major emerging market indices, according to Thomson Reuters data.

“Balance of payments problems and rising inflation mean that Turkey is also likely to hike rates ... despite pressure from the government,” William Jackson, an economist at Capital Economics in London, said in a recent note to clients.

The lira was at 2.91 to the dollar on Dec. 21, little changed from the closing on Dec. 18.

The BIST 100 index, the broadest measure of Istanbul stock performance, was a bit stronger.

Fourteen of 16 analysts polled by Reuters last week said they expected the benchmark one-week repo rate to rise, with most of them predicting a half-percentage point move from today’s 7.5 percent.

They also expect a similar increase in the overnight borrowing rate.

Some market participants refer to the repo rate derisively as the “politicians’ rate” as it does not reflect the true cost of borrowing. That is better reflected by the weighted average cost of central bank funding, which is hovering at around 8.85 percent.

“Tomorrow’s CBRT rate decision will be key for subsequent market direction. A 50 bp hike in the overnight lending rate is expected, although this may end up being viewed as insufficient and dovish, which would cause a sell-off in equities,” Deniz Invest said in a note.