Markets sit in suspense for Turkish rate verdict

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Marc Jones London

Emerging markets steadied yesterday after three days of intense selling, as investors waited to see if Turkey, one of the epicentres of the rout, would raise interest rates to defend its battered lira.

Calmer conditions in Asia meant European shares and peripheral euro zone government bonds were able to claw back some lost ground, but confidence remained brittle.

The conclusion of the US Federal Reserve’s policy meeting today also made traders reluctant to place big bets.

But the immediate focus was on whether the central bank of Turkey would bow to market pressure and hike interest rates at an emergency policy meeting later. India surprised markets earlier by doing just that.

Despite Turkey’s reluctance to unsettle voters ahead of this year’s elections, a Reuters poll showed analysts now expect the Turkish central bank to lift rates by 2.25 percentage points.

The bank will announce the outcome of the meeting at midnight South African time.

The Turkish lira remained volatile ahead of the decision, trading at 2.2640 liras to the dollar, though it kept some distance from the record low of 2.39 liras hit on Monday.

Istanbul’s main stock market, which has lost almost 20 percent over the past four months, climbed 1 percent to help MSCI’s main emerging market index to its first gains in three sessions.

“We think there is room for the central bank to use more conventional monetary policy and that is clearly what the market expects,” said Fergus McCormick, the head of sovereign ratings for Canadian rating agency DBRS.

Investors drew some comfort from the news that a Chinese trust firm had reached an agreement to resolve a troubled high-yield investment product, just days away from what could have been a precedent-setting default in China’s alternative, non-bank lending system.

“The deal to avert default is a source of relief for many, but it is a clear warning on the scale of the risks that still remain with other trust products due to mature this year,” said Jackson Wong, the vice-president for equity sales in Hong Kong for Tanrich Securities.

The Reserve Bank of India raised its repo rate by 25 basis points to 8 percent yesterday.

HSBC economist Leif Eskesen said he expected more rate increases from the bank.

“This was the right decision, but it does not constitute the end to the tightening cycle, in our view.” – Reuters


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