Analysis-Investors lament lost opportunity after unconvincing Turkish rate hike By Reuters

Written by Libby George

LONDON (Reuters) – Foreign investors hoping for a game-changing interest rate hike from Turkey’s newly appointed central bank chief said Thursday’s disappointing move to a key rate of just 15 percent could keep some money on the sidelines.

The appointment of US-trained banker Hafiz Cay Erkan to lead the bank has fueled expectations that it will quickly raise interest rates to undo years of unorthodox policies as soon as possible.

But the 650 basis point increase – to 15% – was well below the median forecast in a Reuters poll for a rise to 21%, leaving some concerned that Erkan may have limited scope to aggressively tackle inflation.

“They missed one perfect opportunity to prove they’re serious about business,” said Victor Szabo, director of emerging markets investment at Abrdn. “Whether it’s because of political constraints, or because they fear for the banking system, it’s not great. It’s not a great message.”

Newly re-elected President Recep Tayyip Erdogan, who has branded himself an enemy of high interest rates, has for years directed a tightly managed economic system, with a tightly controlled lira, low interest rates in the face of accelerating inflation and ample credit for domestic borrowers.

Amid the decline in reserves and the flight of investors, his selection of Erkan in the Central Bank, and the investor’s lover, Muhammad Simsek, as Minister of Finance, led to bets on a rapid transformation to reveal some of these policies.

But analysts said that after Thursday’s decision, Erkan and Simsek will need to work harder to prove that the country has indeed changed course.

“It looks less credible now,” Eric Fine, emerging market debt portfolio manager at VanEck, said of the central bank, adding: “They need to raise interest rates to whatever level precludes the need to intervene in the currency using reserves.”

International bonds suffered for a second straight day on Friday, hitting a new record low of 25.74 per dollar before recovering, while the country’s international bonds made small gains after falling Thursday.

Already in the week ending June 16, foreign investors’ holdings of Turkish government bonds decreased by $16.2 million.

“Right now, it’s probably not enough for long-term investors. Because of the magnitude of some of the problems in the economy,” said Marek Drimal, chief strategist at Societe Generale (OTC:).

Caution and extreme frustration

However, many, including Drimal, saw positive signs, and noted that even Simsek had repeatedly said progressive rate moves were a possibility.

Simsek also promised predictable market-based economic policies and an inflation targeting model that would enable capital inflows.

“I think investors should be disappointed,” said Dan Wood, portfolio manager at William Blair, adding that the bank also indicated it would continue to raise interest rates until inflation improved.

“Obviously it is positive that there are signs of a return to a more traditional economic policy.”

The ratings agency’s associate director, Scoop Ratings and sovereign analyst at Fitch Ratings, said the increase in itself was positive – but the key question would be whether Erdogan would allow Erkan to continue the course as the increases continue.

“I don’t think investors are going to throw in the towel just yet because I think there are still expectations that there will be more in the coming months,” said Kan Nazli, portfolio manager at Neuberger Berman.

“The market is very cautious – so to get confidence back, it’s going to take a long time. I think you’re going to need to maintain a strict policy for a long period of time to see significant inflows in the long run.”