The Central Bank of the Republic of Türkiye has taken a significant step in addressing its economic challenges by raising its key interest rate by five percentage points to 30%. This move, the second consecutive month of aggressive tightening, is noteworthy because it signifies a shift in Turkish President, Recep Tayyip Erdogan’s stance on monetary policy.
Key themes for this week include:
- Turkey hikes rates to 30%, reaching 20-year highs
- United States (US) Federal Reserve (FED), Bank of England (BoE) and the South African Reserve Bank (SARB) keep interest rates steady
- Oil blows off some steam
- Dollar remains at six-month high
TURKEY HIKES RATES BY 500 BASIS POINTS
The Turkish central bank’s decision comes in response to soaring inflation, which reached nearly 59% in August, and is expected to continue rising into the next year. Since June, the bank has increased rates by a total of 2,150 basis points. Following the announcement, the Turkish lira depreciated to ₺27.105/$, approaching its previous all-time low, recorded last month. Economists largely anticipated the 500-basis-point hike, with forecasts expecting rates to be pushed to a range of 27.5% to 31%.
While this rate hike is a significant move towards addressing Turkey’s inflation, analysts believe that it might not be sufficient on its own to convince investors that inflation is under control. James Wilson, an emerging market sovereign strategist at global bank, ING, suggested to media that further rate hikes may be necessary before the end of the year to reassure investors. This change in monetary policy direction follows President Erdogan’s re-election in May, during which he appointed Hafize Gaye Erkan, a former Wall Street banker, to lead the central bank. Previously, Erdogan had advocated for a low interest rate policy despite high inflation, which triggered a currency crisis in late 2021 and led to inflation exceeding 85% last year.
Currently it is anticipated that further monetary tightening will push the policy rate to around 35% by the end of the year, though forecasts for the rate vary between 30% and 40%. Erdogan’s government has also adjusted its year-end inflation forecast to 65% while emphasising the importance of tight monetary policy in combating inflation. This rate hike represents a significant shift towards more conventional economic policies, aligning Turkey with the global trend of central banks raising interest rates to control inflation, which contrasts to Erdogan’s earlier unconventional approach of lowering interest rates to combat rising prices. However, the challenges for Turkey’s economy remain, including the need to address its costly bank deposit support scheme, which has contributed to the depreciation of the Turkish lira.
FED, SARB AND BOE MAINTAIN RATES FOR SEPTEMBER
In its September meeting, on Wednesday, the US Fed decided to maintain the federal funds rate within its already elevated range of 5.25% to 5.5%, aligning with market expectations. Notably, the Fed indicated the possibility of another rate hike later in the year. Projections released through the dot-plot framework suggested another rate increase in 2023, followed by two rate cuts in 2024. The Fed’s forecast for the fed funds rate remained at 5.6% for this year, with a slight upward revision for the 2024 rate to 5.1%. Economic growth expectations were raised, with gross domestic product growth anticipated at 2.1% for 2023 and 1.5% for 2024. Personal consumption expenditure inflation was slightly revised upward to 3.3% for this year but maintained at 2.5% for 2024, while core inflation is expected to ease to 3.7% in 2023 and remain at 2.6% in 2024. Additionally, the unemployment rate projections were lowered to 3.8% for 2023 and 4.1% for 2024.
On Thursday, during its Monetary Policy Committee (MPC) meeting, SARB opted to keep its key repo rate unchanged at 8.25%, in line with expectations. This decision was driven by persistent inflationary pressures, even though annual price growth accelerated to 4.8% in August, marking the first increase in five months. Importantly, this inflation rate remains within SARB’s target range of 3% to 6%. Additionally, SARB adjusted its inflation projections, forecasting average inflation of 5.9% for 2023, down from the previous estimate of 6.0%. However, for 2024, the inflation projection was increased to 5.1% from the previous estimate of 5%. In terms of economic growth, SARB raised its forecasts to 0.7% for this year, up from the July estimate of 0.4%, while maintaining a 1% forecast for 2024. The central bank highlighted ongoing energy and logistical challenges as potential threats to the economic outlook.
Thursday also saw the Bank of England (BoE) decide to maintain its policy interest rate at 5.25%, the highest level since 2008, signalling a pause in its nearly two-year-long streak of policy tightening that included significant rate hikes totaling 515 basis points. This decision came as policymakers assessed the effects of their previous tightening measures, given recent data on inflation and labour. The Monetary Policy Committee voted 5 – 4 to keep rates steady, with four members advocating for an additional 25 basis point increase. The English central bank anticipates a significant decline in consumer price index inflation in the near term, attributed to lower energy inflation, despite renewed upward pressure from oil prices, and further reductions in food and core goods price inflation. The BoE remains committed to further policy tightening if it is deemed necessary.
HAWKISH FED DAMPENS THE MOOD ON WALL STREET
In the US, stock futures dipped on Thursday, with the Dow Jones down around 220 points, the S&P 500 sliding 0.9%, and the Nasdaq 100 dropping almost 1.3%. These declines followed the Fed’s hawkish tone and lower-than-expected jobless claims data. While the Fed left interest rates unchanged, it hinted at the possibility of another rate hike in the near future. On the corporate side, Global tech company, Klaviyo, which made its debut on the NYSE the previous day, slipped nearly 2% in premarket trading. Broadcom, a global supplier of semiconductor and software products, also faced a significant drop of over 6% after news broke that Google had discussed dropping the company as an artificial intelligence chip supplier by 2027. Conversely, global courier giant, FedEx saw a nearly 5% jump in its stock after reporting earnings that exceeded expectations.
In the United Kingdom (UK), the FTSE 100 initially dipped but later stabilised above the flatline at 7,770 after the BoE decided not to increase its bank rate. This decision was unexpected, as markets were divided on whether the central bank would raise rates, given recent inflation data. This marked the first time the BoE held rates steady in nearly two years. It indicates the bank’s caution regarding potential over-tightening risks, especially as growth forecasts were revised lower and private-sector activity slowed. The bank, however, kept the door open for future rate hikes.
European stock markets were mostly lower, with Frankfurt’s DAX 40 declining by over 1%. This movement followed a series of monetary policy updates across the continent. The Swiss National Bank unexpectedly halted its policy tightening efforts, while the central banks of Sweden and Norway raised interest rates by 25 basis points each.
In South Africa, the JSE All Share Index dropped over 2% to its lowest level since 18 August, in line with global markets. This response followed the Fed’s hawkish stance. On the corporate front, several companies, particularly in the tech, resource-linked, and financial sectors, faced significant losses.< /p>
OIL TAKES A BREATHER
In the oil market, West Texas Intermediate Crude futures dipped toward $89/barrel for the third consecutive session. This decline followed a hawkish stance from the US Fed. Concerns about global economic growth and energy demand emerged as a result. US crude inventories dropped by 2.135 million barrels, aligning with expectations. Oil prices, despite this dip, remain close to multi-month highs, mainly due to forecasts of a wider market deficit in the fourth quarter due to extended supply cuts from Saudi Arabia and Russia, along with declining US oil output from major shale-producing regions.
In the precious metals market, gold weakened below $1,930/ounce, stepping back from multi-week highs. This decline was also influenced by the Fed’s hawkish stance. Investors are now awaiting the Bank of Japan’s monetary policy update today, potentially signalling an end to negative rates.
In the copper market, futures dipped toward the $3.60/pound mark, hitting their lowest level since late May. This was driven by a strong dollar and weak global industrial sentiment. Lingering worries about the financial health of Chinese property developers and concerns over a hawkish US Fed added to the pressure on industrial activity. Despite these challenges, copper futures were buoyed by anticipated copper deficits, as production struggles to meet increasing electrification demand. Output from Chilean state-owned Codelco declined by 14% in the first half of the year, continuing a 7% decline from 2022.
CURRENCY MARKETS DIGEST CENTRAL BANK DECISIONS
The US Dollar Index surged above 105.5, remaining at its highest level since early March, following the Fed’s indication that another rate hike remains a possibility. While the Fed kept the target range for the fund’s rate at 5.25% to 5.5%, projections in the dot-plot suggested the likelihood of one more increase this year and only two cuts in 2024. This strength in the US dollar was further supported by the resilient US economy, with weekly jobless claims dropping to 201,000, their lowest level since January.
The British pound depreciated by almost 1% to $1.22/£, marking its weakest level since March. This decline followed the BoE’s decision to keep interest rates unchanged in its September meeting. Notably, four out of nine policymakers voted in favour of a rate hike. Traders now assign a nearly 64% chance of a 25 basis point interest rate increase by the central bank in November, down from an 81% probability before Thursday’s decision.
The euro approached $1.064/€, nearing its lowest level in six months, as signs emerged that interest rate hikes in Europe may be ending. The European Central Bank had recently raised rates by 25 basis points to reach multi-year highs, signaling a potential conclusion to its tightening cycle. Additionally, the BoE’s and Swiss National Bank’s decisions to keep rates steady contradicted market expectations of rate hikes.
The South African rand continued to hover around R18.90/$, struggling to find momentum on either side, while staying close to the three-month low of R19.20/$, primarily due to broad based risk off trading, coupled with concerns over prolonged loadshedding and fiscal risks impacting the country’s economic outlook. Severe power disruptions, maintenance issues, and cold weather have pushed South Africa toward Stage 7 load-shedding, severely affecting various sectors of the economy. Additionally, the National Treasury cautioned about budgetary challenges and emphasised the need for spending control to achieve debt-stabilisation goals.
The rand is trading at R18.92/$, R20.15/€ and R23.23/£.
Sources: Investing.com, Reuters and Trading Economics.