Lira trades sideways ahead of critical central bank meet

Reuters

Turkey’s lira was little changed on Tuesday, with investors holding back from taking big bets ahead of a central bank meeting later in the day seen as a critical test of its monetary policy
credibility.
The lira has fallen some 8 percent so far this year, making it one of the worst performing major emerging market currencies. Investors have been unnerved by insecurity, political uncertainty and a slowing economy and worry the central bank is less than independent.
President Tayyip Erdogan, who wants cheap credit to boost growth, has described himself as an “enemy” of interest rates. As the lira has tumbled – adding to double-digit declines in 2015 and 2016 – the central bank has resorted to unorthodox moves to mop up liquidity, heightening the perception it is looking to avoid an outright rate hike.
“Both currency and local bonds underperformed peers massively this year, suggesting that there is room for recovery if (central bank) action is seen as ‘credible’,” Erkin Isik of BNP Paribas said in a note to clients.
The lira was at 3.7535 to the dollar at 0816 GMT on Tuesday, slightly firmer than Monday’s close of 3.7547 on Monday.
Fifteen of 18 economists polled by Reuters expect the central bank to raise its benchmark repo rate on Tuesday, with nine of them forecasting an increase of 50 basis points.
All but two of the economists expect the bank to hike its overnight lending rate, currently at 8.5 percent, by between 50-150 basis points. The Turkish central bank uses multiple rates to set policy. Still, it may take a lot more to support the currency. UBS said last week that increases of 200 basis points may be necessary to anchor the currency in the next month or two.