Monetary Policy

This is a crucial week for Turkey’s economy and the Central Bank of Turkey’s credibility.

Last Friday we were surprised that a comment from a G7 finance minister, which should have been taken highly positively, was somewhat skipped over by the markets.

Our attention this morning was grabbed by a headline from Italy’s La Stampa, which reported that Finance Minister Giovanni Tria is preparing a 2019 budget that will result in a 1.5% deficit/GDP ratio for the indebted EU nation.

Whilst no hike from the FOMC was expected overnight, markets are still pricing in an eighth hike in September and a ninth in December, which would take the upper bound of the Fed Funds rate to 2.5%.

Even in the midst of a busy earning season, discussions on central bank policy never seem to go away.

Looking at the state of the Turkish economy since President Erdogan decided to meddle in the affairs of its central bank; with the Lira down about 20% vs the US dollar, inflation running at 15%, and the yield on the 10yr government bond running at almost 17%, you might be tempted to think that most leaders would stay well away from the subject.

The area that caused the most concern in the Q1 report was the big drop in availability of unsecured credit to households; however, availability was unchanged in Q2, thanks in particular to a change in appetite for risk from lenders, and also an improvement in market share objectives.

Following central bank commentary and actions has been a really useful source of information in the post global financial crisis world; however, closer to home here in the UK the commentary and the actions have been less consistent than those coming from either the Fed or the ECB.

In recent weeks we have talked often about the tightening of lending standards, the possibility of the end of dot plots, and especially the shape of the US yield curve – today’s blog encompasses all three.

Following on from our recent comment on the level of Italian BTPs and how this has a potential to impact the transmission mechanism, it is interesting to note the subtle but important changes that have been applied elsewhere across the global economy.

Aside from the fact that he is Italian and once served as governor of the Italian central bank there are other reasons why Mario will be concerned at the price action in Italian Government Bonds (BTPs).

After the most hectic week of the year to date, relative calm has at least temporarily been restored to markets.