Crunch day for Turkey, and Ukraine

January 28, 2014

Hard to look beyond Turkey today. The central bank will issue its quarterly inflation report and has called an emergency policy meeting thereafter and will deliver a verdict at midnight local time. All very cloak and dagger.

The central bank, under heavy political pressure, has so far not raised interest rates but is instead burning through its reserves to defend the tumbling lira with only limited success.

It has floated the idea of “additional tightening days” when it will fund the interbank market at a higher rate, which is essentially monetary tightening by the back door. But in the throes of a full-on emerging market selloff it’s hard to see that doing the trick.

The consensus is that a sharp interest rate rise will be required to prevent a run on the currency, something Prime Minister Tayyip Erdogan has vociferously spoken out against. Erdogan’s purging of the police and judiciary in response to a corruption inquiry that has got uncomfortably close to him has unnerved investors.

The central bank said it would “take necessary policy measures for price stability” at its first such extraordinary meeting since August 2011 at the height of the euro zone debt crisis.

Our poll of economists yesterday produced a consensus that the overnight lending rate, which stands now at 7.75 percent, would be whacked up by a huge 225 basis points to 10 percent though in truth it’s anybody’s guess. One analyst forecast a 4.25 points increase. Even then, there was no certainty that such a move would be enough to put a floor under the lira.

Central Bank Governor Erdem Basci will hold a news conference to announce the inflation report at 0800 GMT and may give a hint of what measures bank will be announced later.

Turkey has not helped its own cause but all emerging markets are being rocked to varying degrees by a turbulent sell-off. The Reserve Bank of India unexpectedly raised its policy interest rate earlier though it said it did not foresee further near-term tightening.

French President Francois Hollande is in Istanbul on the second day of a Turkish visit. He is due to meet again with President Gul, as well as the economy minister and a foreign business group. Hollande said on Monday that France was supportive of Turkey’s EU entry ambitions but there was still much difficult ground ahead.

South Africa is not as close to the edge as Turkey but strikes in its platinum mines won’t help and the rand is under pressure. Its central bank will deliver an interest rate decision on Wednesday but has tended to take the view that it doesn’t have the firepower to prop up the currency.

It’s also a crunch day for Ukraine with President Viktor Yanukovich calling an emergency session of parliament. Over the weekend, Yanukovich offered two top government posts – prime minister and deputy premier – to opposition leaders Arseny Yatsenyuk and Vitaly Klitschko. They didn’t accept and continued to press for further concessions, including early elections and the repeal of an anti-protest law.

Last night, agreement was reached to repeal some anti-protest laws and to discuss the fate of the current government at today’s session. A vote of no-confidence could be held as a further sop to the opposition. Washington roused itself with Vice President Joe Biden calling Yanukovich to urge him not to declare a state of emergency and to work with the opposition to bring a peaceful end to unrest.

In Brussels, the EU/Russia summit, already curtailed to one day, follows a period of strained relations after Ukraine backed away from signing a trade deal with the EU in favour of closer ties with Russia. Trade clashes and energy issues, including the Commission’s antitrust case against Gazprom, could also be discussed, as well as Iran and Syria.

British Q4 GDP is likely to show strong quarterly growth – of 0.7 percent or more – good news which will only add to Mark Carney’s dilemma.

With the economy suddenly growing fast, UK unemployment has tumbled almost to the Bank of England governor’s policy trigger point in months, rather than the years he expected it to take, so Carney is under pressure to alter the Bank’s guidance in order to convince markets and British people and companies that interest rates won’t rise soon.

He has already talked of a “broader approach” to gauging when the economy is strong enough to handle higher borrowing costs and signalled a new approach from next month. Is that the end of forward guidance or will the goalposts be shifted? We won’t find out today but the debate will doubtless get another airing.

The Confederation of British Industry said overnight that UK economic output in January grew at its fastest pace since September 2007, suggesting the strength of the recovery persisted into the new year.

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