- Turkish central bank needs aggressive hike to settle investors;
- BoE unlikely to change message as Brexit negotiations enter crucial stage;
- ECB expected to maintain slight tightening plans.
Markets are trading relatively flat ahead of a slew of central bank meetings on Thursday, with the BoE, ECB and CBRT al scheduled to make interest rate decisions.
While the Bank of England and European Central Bank would typically steal the spotlight, it’s actually the Central Bank of the Republic of Turkey that will likely steal the headlines today. With inflation in Turkey close to 18% and the currency having repeatedly fallen to all-time lows against the dollar, it’s become quite clear to all that the central bank needs to step in with a substantial hike and its unexpected pledge last week that its monetary stance will be adjusted, suggests it will do just that.
This would be quite controversial though with President Recep Tayyip Erdogan having been very clear about his opposition to higher rates. Having made his desire for control clear, investors will be monitoring today’s decision very closely to see just how independent the central bank really is. A rate hike looks obvious but how aggressive they’ll be will give a strong indication of how much influence Erdogan has over them.
Traders will be very quick to express their disapproval if the central bank is seen to be not responding aggressively enough which could result in a substantial decline in the Turkish lira. There is currently an expectation of a more than 4% increase in interest rates and it may take more to satisfy investors and avoid such a depreciation. Anything short of this could be bad news for the lira both in the near and long-term.
The ECB and BoE decisions will likely be relative non-events compared to the CBRT. Both central banks have recently announced some monetary tightening – BoE raising interest rates and ECB tapering QE and announcing its end date – and are in no rush to speed the process up.
With Brexit negotiations heating up, the BoE will more than happy to drift into the background having come under fire for its views in the past. With the outlook so uncertain and hanging on the outcome of these negotiations, there’s little upside to the central bank making any changes to its policy message between now and the end of the year and I expect that to come across over the next few meetings.
While the ECB may be less affected by the Brexit negotiations, it has set out a path for the next year that will see it slowly exit its easing program and with the economy experiencing a slight slowdown, it’s going to be in no rush to change course in the near-term. The first rate hike may be a little more delayed than it previously alluded to but I don’t expect it to hint at that until QE has ended.
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