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The critical week of the central bank!

The market expectation is now for a rate hike to a tune of 125-150 basis points which will also prove investors that the central bank will be “let free to act as necessary” despite President Erdogan’s previous claims that he would intervene after the elections. Given the current economic circumstances, Turkey is already heading for a long looking recession anyway. Hence, another rite hike would not make Turkey's growth prospects worse but rather missing it will make investor expectations sour further.

The critical week of the central bank!

Treasury and Finance Minister Berat Albayrak, the son-in law of President Erdogan took stage on the global arena for his first official trip in his new post during the G20 Summit in  Buenos Aires over the weekend. Turkish Central Bank Governor Murat Cetinkaya accompanied him where he promied the investors that Turkey would not step out from free market dynamics as was intensely feared following President Erdogan’s Bloomberg interview in London before the June 24 election.

As per Ahvalnews, Albayrak said that during his term as the minister responsible of economy, Turkey would always be ahead of the markets, rather than following them. “We will not fight with the markets. We will move toward a win-win relationship with strong communication. We will be open and transparent,” he added.

Turkish government will aim to make the Turkish Central Bank more effective and will implement a strategic communication plan that will include banks, investors, and rating agencies, Albayrak noted.

The minister also assured that “a noticeable improvement concerning inflation” would be observed in the near future, as a result of the new medium-term fiscal program that will not compromise budget discipline.

“Turkey will experience a much more powerful period in which it will not live the [problems] it lived in the past with a new development program, budget plan and macroprudential policies,” Albayrak also said to Anadolu Agency during an exclusive interview following the G-20 summit.

Thus, we have the July 24 central bank monetary policy meeting this Tuesday as the litmus test.  Currently, Turkey’s consumer price inflation has hit 15 percent and is expected to rise further to 18-20 percent range in a few months’ time.  Turkey’s benchmark bond rate is currently at 20.4 percent and lira is floating at 4,80-4,85 against the US dollar.

Just as the new AKP term’s macro policy framework of “Medium Term Plan” (MTP) on August 18 is sincerely awaited by the many Turkey skeptic investors; this week’s central bank meeting has similarly turned into a focal point.

Following the market-forced 500 basis points rate hike ahead of the election, the level of the core inflation (14.6 percent, y/y) and the CPI inflation (15.4 percent, y/y)dictate that more needs to be done on the rate hike side in order to keep the lira tame ahead of the release of the MTP details.  Yet, even a round of rate hikes cannot save lira if the MTP fails to convince the markets that economic realities are truly grasped by the AKP’s new economy team.

Thus, the market expectation is now for a rate hike to a tune of 125-150 basis points which will also prove investors that the central bank will be “let free to act as necessary” despite President Erdogan’s previous claims that he would intervene after the elections.  Given the current economic circumstances, Turkey  is already heading for a long looking recession anyway.  Hence, another rite hike would not make Turkey’s growth prospects worse but rather missing it will make investor expectations sour further.

Moreover, Minister Albayrak who just said what the markets wanted to hear at the G20 Summit, that is orthodoxy in Turkey’s macroeconomic policies, will lose from his not-yet-earned credibility if the central bank misses the opportunity to adjust the policy rate higher as Turkey’s double-digit inflation dictates.

Thus, Tuesday, the July 24th; 14:00 Turkey time will be the peak hour this week that will set the tone of the coming term perhaps.

GA.

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