The lira pared its seventh day of declines as Turkey’s new central bank governor Sahap Kavcioglu gave currency traders what they wanted to hear, delivering a promise of tight monetary policy.
(Wednesday morning: dollar/TL at 8.32-33)
Local markets are still reeling from Turkish President Recep Tayyip Erdogan’s shock firing of Kavcioglu’s market-friendly predecessor more than a week ago. Before the governor’s remarks on Tuesday, the lira fell almost 3% after the latest surprise appointment at the central bank.
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Kavcioglu pledged a “tight monetary stance” and said Turkey will continue to keep its benchmark one-week repo rate above consumer inflation. Speaking at the monetary policy authority’s annual board meeting in Ankara, he vowed to use monetary tools effectively and “independently.”
“Kavcioglu has made yet another attempt to reassure nervous investors that monetary policy will remain tight, providing the lira with some brief respite,” said Rabobank’s Piotr Matys. “But he will find it difficult to convince the market to give him the benefit of the doubt after yet another dramatic reshuffling at the central bank.”
Central Bank is stuck between a rock and a hard place. Current policy rate of 19% is not high enough to lower inflation, which is certain to get a 3-4% per annum boost from the recent deprecation of the currency. Higher rates will attract the wrath of President Erdogan and jeopardize the solvency of thousands of small and medium businesses, which are heavily indebted.
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Goldman Sachs became the first investment bank to notice the dilemma, raising its 2021 inflation forecast, as it trimmed its GDP growth:
Goldman Sachs expects Turkish inflation to rise to 18% in April and dip to only 15% by year end after the ousting of the central bank governor sparked a lira selloff this month, the Wall Street bank said on Tuesday as part of several forecast revisions.
Goldman, which previously saw 12.5% end-2021 inflation, said the central bank under new chief Sahap Kavcioglu will not be able to cut interest rates until the fourth quarter given the 13% lira depreciation since he was appointed on March 20.
It also cut its 2021 economic growth forecast for Turkey to 3.5% from 5.5% before the overhaul, and also lowered its current account deficit prediction to 1.5% of GDP from 3.5%.
“The main risk to our forecasts is that the authorities may push for growth with premature rate cuts or an increase in lending,” Goldman said in a client note.
Despite carry-over of 4% GDP from 2020, even 3.5% growth sounds optimistic, as all restaurants, bars and cafes will be ordered shut between 13 April – 13 May, exacerbating the unemployment problem, thus bearing on private consumption.
Turkey could even dip into a recession, if promised vaccines fail to arrive before end of June, killing the tourism season, forecast to generate $23 billion in 2021.
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