Turkish-American Detente Pays Off as Pressure to Hike Rates Ebbs

(Bloomberg) — Such is the relief over U.S. pastor Andrew Brunson’s release that pressure on Turkey to raise borrowing costs is finally abating.

The lira swap market suggests traders are scaling back bets for a large rate increase next week after speculation that Washington and Ankara may patch up relations added fuel to the lira’s rally this month. U.S. Secretary of State Mike Pompeo will visit Turkey on Wednesday, according to Haberturk newspaper.

The one-year cross-currency swap rate fell for a fifth day to below 30 percent on Monday, a level that has mostly held since August, when policy makers unleashed a series of measures leading to a whopping 625-basis-point hike in September. The policy response backstopped the lira after U.S. sanctions on Turkey over Brunson’s continued detention sent the currency into a tailspin.

While the implied overnight rate on the one-year contract is still around 26 percent — 200 basis points above the benchmark one-week repo rate — and inflation has jumped since the central bank’s last meeting, the rally from a record high earlier this month is a sign that investor appetite for lira assets is healthy at these levels.

That’s a godsend for an economy that’s teetering on the brink of a recession, where only last month investors were bracing for higher borrowing costs to help put an end to a year-long rout that has knocked some 35 percent off the currency’s value, and a comfort for the central bank before it meets to set policy on Oct. 25.

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