Global Investing

No policy easing this week in Turkey and Chile

August 14, 2012

More and more emerging central banks have been embarking on the policy easing path in recent weeks. But Chile and Turkey which hold rate-setting meetings this Thursday are not expected to emulate them. Both are expected to hold interest rates steady for now.

In Chile, the interest rate futures market is pricing in that the central bank will keep interest rates steady at 5 percent for the seventh month in a row. Most local analysts surveyed by Reuters share that view. Chile’s economy, like most of its emerging peers is slowing, hit by a potential slowdown in its copper exports to Asia but it is still expected at a solid 4.6 percent in the third quarter. Inflation is running at 2.5 percent, close to the lower end of the central bank’s  percent target band.

Turkey is a bit more tricky. Here too, most analysts surveyed by Reuters expect no change to any of the central bank rates though some expect it to allow banks to hold more of their reserves in gold or hard currency. The Turkish policy rate has in fact become largely irrelevant as the central bank now tightens or loosens policy at will via daily liquidity auctions for banks. And for all its novelty, the policy appears to have worked — Turkey’s monstrous current account deficit has contracted sharply and data  this week showed the June deficit was the smallest since last August. Inflation too is well off its double-digit highs.

But Turkey’s economy too faces headwinds, most of all from the euro zone where it sends most of its exports. Growth is slowing and there are signs the central bank as well as exporters are getting a bit restless about the currency (the lira is up 5 percent this year versus the dollar). UBS strategist Manik Narain says:

The bias is for looser policy but there is no real need to cut the policy rate. They may reduce the ceiling of their overnight rates corridor to indicate they are starting to feel discomfort with the lira’s strength but for the time being their policy tools are doing their job for them.

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