May 30, 2018 / 1:05 PM / 7 months ago

UPDATE 1-Turkey's lira extends rare hot streak after central bank moves

(Recasts, adds poll, cenbank minutes)

By Ezgi Erkoyun and Nevzat Devranoglu

ISTANBUL, May 30 (Reuters) - Turkey’s lira hit its firmest level in nearly two weeks on Wednesday, as emergency measures by both the central bank and top officials helped alleviate some of the concern about the direction of monetary policy under President Tayyip Erdogan.

The lira is on track for its best week in nine years, after a market rout last week that forced the central bank to hike rates by 3 percentage points at an emergency meeting. The bank has also announced plans to move to a single policy rate, a move long sought by investors.

Still, the market remains cautious. Ratings agency Moody’s on Wednesday slashed its forecast for Turkey’s 2018 economic growth to 2.5 percent from 4 percent previously, citing the sell-off in the lira and the impact of double-digit inflation on growth.

“There was the rate hike last week and this week they announced the central bank would simplify its policy framework,” said Per Hammarlund, chief emerging markets strategist at SEB.

“This suggests the central bank will be more autonomous when it sets interest rates and monetary policy – it could change in future but for now it signals the central bank will be more independent and that’s very good news for the lira.”

The lira was at 4.4560 to the dollar at 1202 GMT, firming some 2 percent and not far off its firmest since May 18. Last week it hit a record low of 4.9290, prompting the emergency move by the central bank.

The main stock index was 0.65 percent lower at 10,4417.

Investors have hammered the currency - at one point sending it down by as much as 20 percent this year - on concerns about Erdogan’s drive for lower interest rates. The selling accelerated this month after he said he would look to take greater control over monetary policy following June 24 presidential and parliamentary elections.

Deputy Prime Minister Mehmet Simsek and Turkish Central Bank Governor Murat Cetinkaya met with investors in London on Tuesday, and dialled back on Erdogan’s messages on interest rate policy. They insisted the central bank has the freedom to defend the lira, according to investors who met them.

INFLATION FIGHT

On Wednesday Simsek said on Twitter the meetings were “beneficial” and that Turkey would prioritise the fight against inflation and the current account deficit.

But taming inflation has not proved easy for the bank. A Reuters poll showed on Wednesday that monthly inflation is likely to jump 1.45 percent in May. That would translate into an annual increase of nearly 12 percent.

“The impact of the devaluation of the lira is slowly being seen in inflation,” said Ozlem Bayraktar, chief economist at Tacirler Investment. Annual inflation could rise toward 13.5 percent in July before ending the year at more than 11 percent, she said.

The central bank said its tight stance would be maintained decisively and further monetary tightening would be delivered if needed, according to the minutes of its emergency meeting last week, which were released on Wednesday.

Separately, official data showed that the economic confidence index fell to 93.5 points in May, further easing from a five-month high reached at the start of this year. (Additional reporting by Ali Kucukgocmen in Istanbul and Claire Milhench in London; Editing by David Dolan and Andrew Roche)

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