Turkey is on the front line of the war against Iran: it shares a 530 kilometer border with the Islamic republic. The same can be said of the country’s finances. Many investors expect Turkey’s central bank to raise interest rates on Wednesday to combat inflation and currency pressures caused by the conflict.
There is a lot at stake. Over the past two years, Turkey has regained its lost reputation for sound economic management, allowing the country’s central bank to cut its key interest rate from 50 percent to 37 percent. So next week’s meeting is widely seen as a litmus test for its credibility.
JPMorgan expects the central bank to raise the policy rate to 40 percent. Goldman Sachs also says policy should be tightened, arguing this is necessary “to prevent further deterioration in the core trade balance and inflation.” But how it will act is unclear.
Officials claim the economic shock of the war is “manageable.” The current policy rate is 7 percentage points above inflation – a difference that has so far discouraged Turkish savers from switching to dollars. The central bank has spent more than $50 billion supporting the currency since the war began, Fitch estimates. But gross reserves, including currency swaps, remain high at $170 billion. The current account deficit remains modest for the time being.
But this may not last. Inflation is persistent and Turkey, which imports most of its energy needs, had forecast an average oil price of $65 a barrel this year. However, Brent has recently been hovering around $95 per barrel.
Adding to the uncertainty, the most hawkish member of the bank’s monetary policy committee, Deputy Governor Osman Cevdet Akçay, will retire just before the interest rate decision. John Paul Rathbone
How is sentiment holding up in the eurozone’s largest economy?
Euro zone investors will be closely watching numerous survey data from German investors and companies next week for signs of how rising energy prices are rippling through the region’s largest economy.
S&P Global will release its purchasing managers’ indices for Germany’s manufacturing and services sectors on Thursday, a closely watched gauge of economic conditions.
In addition, Tuesday’s Ifo business climate index and Friday’s investor-focused ZEW economic sentiment indicator will provide an important picture of how the energy shock is affecting Germany’s economic momentum.
“The coming week will be instructive in gauging how quickly sentiment is deteriorating in the eurozone, especially in Germany,” said Modupe Adegbembo, economist at Jefferies.
Adegbembo said she expects Germany’s composite PMI to weaken to 50.3 points in April, from 51.9 in March, “as higher energy prices, supply uncertainty and weaker confidence start to weigh on new orders and business expectations.” She also expects softer figures for the ZEW and Ifo surveys.
Signs of weaker activity would be a key focus for policymakers at the European Central Bank.
While traders are still pricing in rate hikes this year, ECB President Christine Lagarde stressed this week that it was too early to draw conclusions on interest rates, and that market prices for higher interest rates could change quickly if there was any sign that weak growth – rather than rising inflation – is a bigger risk.
“A softer set of PMIs, Ifo and ZEW would reinforce the message that the energy shock is filtering through mainly through weaker sentiment and activity,” Adegbembo said. This would “support our view that growth risks are rising faster than inflation risks over the medium term”. Emily Herbert
How is Britain faring amid the fallout of war?
Investors will look at a handful of data next week to see how the war in the Middle East is affecting the British economy.
The focus will be on March inflation, expected on Wednesday. Economists polled by Reuters expect a rise in gasoline prices to have pushed the annual nominal rate to 3.3 percent, up from 3 percent in February.
The war and the expected consequences of inflation initially prompted traders in the swap markets to price in rate hikes of four quarter points from the Bank of England this year. This has fallen to barely one as a ceasefire and lower energy prices have allayed concerns about inflation.
However, any disappointing news on inflation could prompt a revision of that outlook ahead of the BoE’s next policy decision on April 30.
“We believed that the collective mood within the Monetary Policy Committee will be ‘alert and cautious’ on price pressures over the medium term, although our basic view remains that interest rates will not be raised this year,” said Philip Shaw, an economist at Investec.
Data on producer input costs, also due to be released on Wednesday, will show how energy costs are stacking up for UK businesses. Friday’s retail sales figures will provide insight into how consumers responded to war-related uncertainty and the rise in gasoline prices.
Unofficial surveys – S&P Global’s purchasing managers’ indices on Thursday and the GfK consumer confidence index on Friday – are expected to point to weaker business and consumer confidence in April compared to March. Valentina Romei
