Ker-pow! Turkey leaps to lira’s defence

January 29, 2014


Turkey’s central bank bit the bullet last night, despite Prime Minister Tayyip Erdogan calling for it to hold firm just hours beforehand, and what a bite it was.

After months trying to avoid a rate rise it put 4.25 full percentage points on the overnight lending rate, taking it to 12 percent. No one can accuse Governor Basci of being under the government’s thumb now. The move vaulted expectations.

The big questions for Turkey are what such a magnitude of tightening, which the central bank said would persist, does to a faltering economy and how Erdogan, who is on a two-day trip to Iran, reacts.

It was his crackdown on the police and judiciary in response to a corruption inquiry that has got uncomfortably close to him, that more than anything else has unnerved investors. But let’s not forget that before that he railed against a shadowy “interest rate lobby” which he said was trying to undermine Turkey. With elections looming he may lash out.

The wider question is whether Turkey’s dramatic move is enough to fundamentally shift sentiment about emerging markets which have been in the grip of a week-long sell-off. Or will it merely lift Turkey out of the firing line? Or will it achieve neither? For now, the lira has shot up.
All that puts the focus on South Africa’s Reserve Bank which has its own decision to make today.

It was widely expected to keep interest rates at a four-decade low of 5.0 percent. Inflation is above target and the falling rand could push it up further. It has tended to take the view that it doesn’t have the firepower to prop up the currency but with India and Turkey having raised rates in the last 24 hours there may be cause to think again or risk moving to the sharp end of the latest bout of market turbulence.

The underpinning factor behind the selloff is the Federal Reserve’s move to begin slowing the pace of its money printing, a large part of which flooded into emerging markets and is now pulling out. The Fed’s policy decision will be announced after European markets close. There doesn’t look to have been enough in the latet evidence about the U.S. economy to warrant a pause in the “tapering” it began in December.

After Ukraine President Viktor Yanukovich turfed out his government yesterday, we have a regular cabinet meeting which will give acting premier Arbuzov his first outing while an emergency parliament meeting continues and will consider an amnesty for protesters detained in the unrest. Yanukovich has offered his opponents a string of concessions in recent days but has so far not succeeded in co-opting them.

The European Commission will unveil its plan to curb the power of big banks. It should be a big moment but Germany, France and Italy have attacked its proposal to curb banks’ ability to take market bets with their own money, this after plans to set up a system of banking union were watered down by EU members states late last year.

Leaked plans show the Commission will propose banning proprietary trading at banks above a certain size, in a way which already falls short of what the Volcker Rule is demanding in the United States. France and Germany went public on Monday, saying banks should ring-fence speculative activities rather than be banned from them outright. The question is whether the Commission’s plan have now be diluted further and laden with exemptions. All in all it looks like another victory for the bank lobby.

The Italian parliament will begin debating proposals for electoral law reform, perhaps the most critical issue facing the country if it can come up with something that can deliver more stable governments in future. New centre-left leader Matteo Renzi has struck a deal with centre-right leader Silvio Berlusconi which could ensure passage of a new law intended to favour large coalitions and ensure stable government over a full term. But others will try to undermine it.

Prime Minister Enrico Letta will take a group of ministers to Brussels to meet EU Council President Van Rompuy and Commission President Barroso. Discussions are likely to focus on economic and institutional reforms and Italy’s aims for its EU presidency in the second half of the year. 

Bank of England Governor Mark Carney will deliver his first speech in Scotland and will address the economic arguments behind the independence campaign. He has a more pressing problem. With the economy suddenly growing fast, UK unemployment has tumbled almost to his 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.

Germany’s GfK consumer morale gauge, just out, has risen to its highest point since August 2007. Euro zone money supply data will show whether there is any sign of a pick-up, absent so far, in bank lending which could fuel more powerful economic growth across the currency bloc. Fresh from a period of convalescence after breaking a bone skiing, German Chancellor Angela Merkel speaks to the Bundestag and will outline her new coalition government’s priorities.

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