Turkish lira in turmoil

The US Federal Reserve kept its key rates unchanged – as expected – after its monetary policy meeting last week. The Fed is keeping the Fed Funds target rate between 0% and 0.25%, with monthly bond purchases steady at $120 billion. It has suggested that no rate hikes should be expected until late 2023 or early 2024. However, it was decidedly more optimistic regarding economic perspectives. The Fed is expecting 6.5% growth this year, up from previous forecasts that, as late as December, expected 4.2% growth. Forecasts for 2022 changed much less to 3.3%, up from 3.2%. Inflation should also be higher than previously expected at 2.4% this year, and 2% in 2022. As late as December, the US central bank still expected rates under 2%. ‘If we do see what we believe is likely a transitory increase in inflation […] I expect that we will be patient’, said Jerome Powell at the press conference. The rates will therefore remain between 0 and 0.25% ‘until substantial further progress has been made’ on the economic front. ‘There are 10 million people […] who need to get back to work, and it’s going to take some time for that to happen’, he added. The yield on 10-year Treasury notes rose to 1.7490%, the highest since January 2019, they day after the meeting. The rise in bond yields in recent weeks does not seem to have disturbed the Fed, which sees the upward movement as a sign of the economic upturn. The US dollar, buoyed by this news, remains strong and at its highest level against the euro this year. Wall Street seemed to welcome the Fed’s comments, with the Dow Jones reaching an all-time high of 33,227.78 last Thursday.

The Turkish lira has been in turmoil in recent days. Last week the Turkish Central Bank raised rates by 2% to 19%, exceeding analysts’ expectations. It all seemed like Governor Naci Agbal had political support for his interest rate management. But on Saturday, President Recep Tayyip Erdogan dismissed Naci Agbal after less than five months in office.  And Sahap Kavcioglu was named as his successor. Mr Kavcioglu is considered a proponent of a low-interest-rate policy. The Turkish currency closed at 7.2170 lira to the dollar on Friday and fell to 8.47 lira by the time Asian markets opened on Sunday evening following the decision. After a slight recovery, the pound was still more than 10% below its Friday level. Monday morning, in the wake of the decision, the Istanbul stock exchange and its index, the XU 100, plummeted. The stock exchange suspended trading twice after the plunge of the flagship index. The first suspension lasted 35 minutes after the index fell by 6.65%, and 8 minutes after trading resumed a new suspension was enforced after a further drop of 7%. In the aftermath, the Turkish Finance Minister sought to reassure the markets and declared that his country would maintain a floating exchange rate. The USD/TRY has been trading between 7.70 and 8.00 in an extremely tight market.

The Bank of England on Thursday kept its key interest rate unchanged at a record low of 0.1%. It said the outlook for the second quarter was ‘slightly better’ than last month the country began to come out of the lockdown. The central bank said in its statement that inflation will rise rapidly to around its 2% target this spring. In February the BoE expected 5% growth in 2021 but so far GDP has contracted by 2.9% in January and is still 9% below its February 2020 level. 

The Central Bank of Russia surprised the markets by announcing a 25 basis point hike in its main policy rate to 4.5%, the first since 2018, at its meeting last week. It justified its decision by a higher than expected rise in inflation in the first quarter and warned that further hikes are in store if this continues. The inflation rate rose from 5.2% to 5.7% from January to February and by 15 March it was 5.8% – above the 4% target. At her February meeting, CBR Governor Elvira Nabiulina stated that the downward cycle in interest rates was over, but she believed that monetary policy should remain accommodative this year.

The return of COVID, with the 3rd and 4th waves, and new lockdowns announced across Europe caused the price of a barrel of crude to plunge sharply. WTI and Brent have lost more than 4 dollars per barrel since Monday. The market is anticipating a drop in demand following measures announced after the discovery of new variants of the virus which saw France and Poland lock down again while Germany announced yesterday an extended period of restrictions for the Easter week.