Turkey has under-delivered on rate hikes for a second month, but foreign investors are as yet unfazed and expect fresh money flows, cooling domestic credit and rising currency reserves to provide some breathing space to the battered emerging market.
Policymakers hiked interest rates by 250 basis points to 17.5% in their second meeting under new Governor Hafize Gaye Erkan on Thursday, continuing to reverse the low-rates policy that had been favoured by President Tayyip Erdogan and promising more tightening and additional measures.
Investors were betting the government would try to avert a recession ahead of local elections in March, and were reassessing the timing of much needed further rate hikes, said Liam Peach, senior emerging markets economist at Capital Economics. However, that might also be changing said Paul McNamara, a London-based investment director at GAM Investments, pointing to the lower trajectory of domestic credit growth - a potential signal that Turkey might be moving away from red-hot growth that had fuelled recent boom-and-bust cycles.
"I would strongly expect a clear roadmap, especially when there are increased pressures of further inflation," said Emre Akcakmak, a senior consultant at emerging markets fund manager East Capital.
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