Complex Made Simple

Turkey’s lira eases as investors pause before critical central bank meeting

Turkey’s lira weakened slightly on Monday as investors took a cautious tack a day before a central bank meeting widely seen as a major credibility test in the face of a tumbling currency.

The lira has fallen some 8 percent so far this year, on top of double-digit declines in both 2015 and 2016. Investors have been shaken by the fall-out from last year’s failed coup and worries that the central bank is less than independent. President Tayyip Erdogan, long a critic of borrowing costs, wants cheap credit to spur a flagging economy.

The lira was at 3.7682 to the dollar at 0937 GMT on Monday, slightly weaker than its close of 3.7640 on Friday, when the Turkish currency firmed 1.6 percent.

Fifteen out of 18 economists polled by Reuters expect the central bank to increase its benchmark repo rate on Tuesday, with nine of them forecasting an increase of 50 basis points. But it may take a lot more to support the currency. UBS said last week that increases of 200 basis points may be necessary to anchor the currency in the next month or two.

“We expect (the central bank) to hold interest rates constant or make a very limited rate hike below market expectations at the MPC meeting,” analysts at Odeabank said in a note to clients. MPC refers to the bank’s monetary policy committee, which ultimately decides on rates.

That would fall short of the clear signal markets are hoping for. So far, the central bank has relied on a series of liquidity measures – what analysts are calling “covert rate hikes” – in an attempt to shore up the currency. The moves have yet to turn the tide for the lira and have only underscored concerns the bank is reluctant to act decisively, market participants have said.

The central bank has closed off some of its traditional funding taps, forcing banks to borrow from its costlier “late liquidity window” to drive up borrowing costs. It has also introduced forex swaps.

“The central bank will hike rates more gradually than the markets expect, and it has indicated that it prefers liquidity management rather than emergency rate hikes to fend off pressure that it sees as more transitory,” Goldman Sachs said in a note to clients.