3Q CENTRAL BANKING: Turkey's Hand May Be Forced By The Fed

 
  By Emre Peker 
 

        Turkey's central bank will struggle to curb rising inflation in the third quarter, as political uncertainties threaten a fragile currency and the slumping economy.
        Following the June 7 elections, Turkish politicians face the hard task of forming by mid-August the first coalition government since 2002. Otherwise, snap polls could exacerbate volatility in Turkey as emerging markets brace for the U.S. Federal Reserve's anticipated interest rate increases this year.
        That leaves central bank Gov. Erdem Basci in a bind, and increases the likelihood that Turkey's central bank will remain on hold, economists say. Yet once the Fed moves, Turkish policymakers will also have to start raising interest rates, despite concerns it could hamper economic growth--forecast at about 3% this year.
        Already, Mr. Basci is on the back foot: inflation jumped to 8.1% in May, bucking central bank forecasts that it would drop to the official target of 5% this summer.
        "Recent movements in the exchange rates have delayed the improvement in the core indicators," the central bank said after its June meeting, keeping interest rates steady for a fourth consecutive month.
        The lira has slumped 14% against the dollar this year, hitting a record low 2.8096 per greenback a day after the election.
        Investors have also withdrawn almost $5 billion from Turkey in 2015, as political turmoil fueled a broader exit from emerging markets.
        Still, Turkey's central bank has refused to raise its benchmark 7.5% one-week repo rate or the 10.75% overnight lending rate, trying instead to fight market volatility, currency weakness and high inflation with tight liquidity.
        "The evolution of capital inflows and thus the currency will continue to shape monetary policy," said Citigroup economists Ilker Domac and Gultekin Isiklar. "This, along with the disappointing inflation performance so far and the challenging growth outlook, points to another difficult year for the central bank."
        --Write to Emre Peker at emre.peker@wsj.com
        (END) Dow Jones Newswires

        July 08, 2015 05:59 ET (09:59 GMT)

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