Central Bank’s rate decision tops markets’ agenda
In recent days, the most important reason behind an ease in the foreign currency rates is an expected rate hike decision by the Central Bank in its meeting this week. Now the question is whether the interest rate hike will be three or five points.
Almost all market players agree that there will be a hike, but they have unprecedentedly different opinions about the hike ratio. As various market surveys reveal that the raised rate might either be two points, between seven and eight points, or even 10 points. It is obvious that in any other country the expectations about the Central Bank’s decision cannot be that different from each other. However, up until now, we did not have such huge differences in expectations.
The global markets were generally calm last week. The emerging currencies even gained a little value against the greenback. However, it is claimed that the expectation of the Central Bank’s signal for an interest rate hike played a key role in the ease we have currently been witnessing in the lira’s value against other currencies.
Some of the market players expect a three-point interest rise. They argue that the reason behind this is that the Central Bank cannot hike the funding interests to the late liquidity window interest rate, which is at 20.75. A banker remarked that until Sept. 13 or Sept. 14, the Central Bank will ease the market by keeping the funding rate at 20 percent, but will narrow the market by increasing the funding rate up to 20.40-20.50 in the last two working days of the week. On Sept. 13 and Sept. 14, when the funding rate increases, the exchange rates come back.
“If the Central Bank had a significant rate hike plan, such as five points, the funding rate would have been up to the late liquidity window and moved on from there,” said the banker.
The same banker added that there are quite different expectations about the level of the rate hike, while the average of the estimates is from three to five points.
Above this, there are various comments about the need of the rate hike, but those who comment do not expect an increase above five points.
Medium-term economic program to be next
In the meantime, during the days up until the Central Bank meeting, the Central Bank funding movements will be monitored and the interest rate hike expectations might be clarified several days before the meeting.
Well, what would the reaction of the market to the points be?
The market players that we have consulted in this manner have commented that the market has priced a hike but a definite rate is not priced. However, in the case of a three-point rise, the number of the bankers who say that the foreign exchange rates would start to rise again is quite high. In exchange of this, there are players who expect that in the event of a five-point rise, foreign exchange rates may return from this level, while some others say that a five-point increase will only be enough to save the current foreign exchange rates.
What is obvious is that the market has already bought a three-point interest rate hike.
The answer to our previous question about how long the impact of a five-point rate hike will last is “until the new medium-term economic program [MTEP] is announced.”
It was earlier expressed that the new MTEP would be announced mid-September.
If the interest rate is surprisingly hiked by five points or more, then I believe that it would be better not to expect much about the content of the MTEP.