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Financial News: Turkey CB Likely To Follow More Aggressive Tightening

Turkey CB Likely To Follow More Aggressive Tightening Policy Amid Weak Lira

11/22/2017 - 07:25:00 (RTTNews)

(RTTNews) - The recent slide in the Turkish Lira may prompt the central bank to consider a more aggressive tightening of policy in the near future, William Jackson, an economist at Capital Economics, said.

The Turkish lira remained the worst performing emerging market currency so far this month, declining by 4.1 percent against the US dollar.

"This has already prompted the central bank to nudge up the average cost of the funding it provides to commercial banks and to begin auctioning non-deliverable forward contracts in an effort to shore up the currency," the economist observed.

However, investors appear to be increasingly concerned that these moves amount to tweaking around the edges and that political pressures prevent the Monetary Policy Committee from tightening monetary policy significantly.

The sell-off in the lira may in part be attributed to shifting expectations for the US monetary policy.

Short-term US Treasury yields have steadily increased over the past couple of months, Jackson pointed out.

Indeed, Turkey is the most vulnerable EM to rising US interest rates.

Political relationship with the United States and the widening current account deficit are also concerns for the central bank.

Capital Economics said its plausible that the Turkey-centric factors exerting pressure on the lira may fade.

Looking ahead further, politics-related sell-offs in Turkish assets tend to be short-lived and oil prices likely to fall back by the end of next year. This should reduce country's import bill.

"We also think inflation has peaked and should begin to ease," the economist added.

It's worth noting that the lira has underperformed relative to other assets, such as CDS.

"That said, we would stress that the lira remains probably the most vulnerable EM currency to the interest rate hikes that we expect in the US next year," Jackson said.

Although forecasting near-term moves in the currencies is almost impossible, one point to stress however is that the recent falls in the lira are similar in scale to those that have previously prompted a more aggressive response by the CBRT, the economist concluded.

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