Fed’s rate hike and coalition talks

Fed’s rate hike and coalition talks

The volatility in the global financial system continues. While on one hand, the collapse of talks with Greece creates anxiety in the markets, the debates on the other hand over when and to what degree the U.S. Federal Reserve (Fed) will start hike rates are the main reasons behind the volatility.

The biggest fear in Turkey, from the point of its domestic markets, is for the Fed to decide to start rate hikes in September and for that decision to coincide with the continuation of political uncertainty. In other words, for the two to come together.

The bankers I have talked again started to mention the Fed’s rates hike in September as a high probability. They say early signals will start coming earlier and thus, it will be start to be priced in one or two months.

Bank officials are closely following this development, as well as the coalition talks. News from international agencies that the president wants actually a new election, as well as the rumors about possible coalition scenarios are being followed carefully by bankers.

Market players say that coalition talks should start and finish by the month of July. They are of the view that if there is a decision for an early election in November, uncertainties will increase in the market and there could be sharp movements.

A bank official who said foreigners are closely following the developments and are not leaving yet, in the possibility that markets improve in the case of a coalition. He added that when there is a Fed’s rate hike, there will be an exit in countries similar to Turkey and that Turkey will be negatively affected. “On top coalition talks not succeeding, this could be perceived in an exaggerated way by foreigners and exits could accelerate,” said the bank official. The same person added that if the Fed’s rate hike and political uncertainty coincides, leading to a high probability of foreigners exiting Turkey’s markets quickly, they are concerned that the resulting disruption in the markets could be much bigger.

The problem of the Central Bank’s reputation

Another reason behind the concerns is the Central Bank’s reputation, which has been harmed in the past. Bank officials say that in times of uncertainty, the Central Bank intervene in a more robust way, thus why the independence of central banks carry a vital importance. Yet, they do point to the fact that in Turkey, the reputation of the Central Bank has been harmed considerably and that’s why trust in the bank has diminished.

The debate last year between President Recep Tayyip Erdoğan and the Central Bank over the interest rate constituted a turning point for markets, according to one banker. “The Central Bank can intervene in this period and take radical decisions. In fact, it looks like it can do that. Yet, there is a concern over the probability of the president interfering and stopping the Central Bank’s necessary steps. That’s why there is no trust in the Central Bank for times such as these,” he said.