For the second consecutive month, Turkey has tightened monetary policy by raising interest rates 200 basis points to 17% during the central bank's final meeting of 2020. This is higher than the market forecast of 150 basis points, and it represents the highest benchmark one-week repo rate in 18 months. Put simply, Ankara is gradually regaining some credibility on The Street for embracing orthodox policies.
Turkey Boosts Street Cred
The foreign exchange markets were pleased by the announcement as the Turkish lira gained as much as 1.1% against the US dollar during the Christmas Eve trading session. Since President Recep Tayyip Erdogan introduced a new head of the central bank, forex traders have been ebullient over the lira's prospects, making it one of the top-performing currencies against the greenback since early November.
Although Turkey still has lots of work to do to reverse the previous policy chiefs' damage, the markets are willing to give Ankara the benefit of the doubt. And their confidence has started to pay off, with foreign exchange reserves climbing for five consecutive weeks from $40.373 billion to just short of $50 billion.
Despite embracing conventional mechanisms in tackling fiscal and monetary matters, Turkey also needs to contend with other internal and external economic issues. While the domestic economic recovery is proceeding as expected, it is facing regional difficulties amid a resurgence in coronavirus cases. Turkish heads are also sounding the alarm about popping inflation, leading the central bank to maintain its tightening endeavors until it sees "a permanent fall in inflation."
Overall, perhaps to the chagrin of President Erdogan, who has defied basic economic reasoning over the last 18 months, the lira could be setting itself up for a big 2021, at least among the emerging market currencies. Like the old Cold Porter tune, anything goes.
Carry the Freight
What does not get enough attention in international headlines is that the coronavirus public health crisis has decimated the global supply chain. This has resulted in freight rates skyrocketing for trading firms in Asia amid postponed deliveries and increasing business losses. It is terrible news for an industry that already runs on tight profit margins, even before the COVID-19 calamity struck the globe.
Between March and November, freight rates from Shanghai to the United Kingdom surged four times. During this same period, freight rates from Shanghai to Los Angeles tripled. Why the huge jump? A container shortage, booming shipping demand, and a paucity of transportation space. Rising container shipping costs may be perturbing businesses. Industry experts assert that trade will remain slow and ports worldwide will continue to weaken as long as the COVID-19 pandemic affects international commerce.
Plus, the current situation could intensify if the pandemic rages on into the summer and sparks volatility in crude oil prices. But the industry is optimistic that the global economy could partially return to pre-pandemic levels by the end of next year. No matter what, it is hard not to envision the rising freight rates spill over into higher consumer prices.
The Loan Ranger
What's the deal with mortgage rates these days? According to Freddie Mac, a government-sponsored enterprise (GSE), the 30-year mortgage rate slipped another one basis point to an all-time low of 2.66% in the week ending December 18. In other words, it has never been cheaper to take out a mortgage to acquire the home of your dreams.
The year 2020 had been all about historically low interest rates. The 30-year mortgage rate posted 16 fresh all-time lows, cratering from around 4% at the beginning of the Roaring Twenties 2.0.
But this has been the trend since the middle of 2018 when the 30-year mortgage began to decline and contribute to the second housing bubble in more than a decade. Since it has never been cheaper to borrow $500,000 for a property, more buyers are being nudged into real estate. This is what happens when you flood trillions of dollars into the market and make credit as cheap as a Paul Krugman book in a discount bin at the dollar store.
Still, like Turkey and Asia's freight companies, the real estate market will be driven by what happens in the COVID-19 pandemic and vaccines' efficacy rates, says Sam Khater, chief economist at Freddie Mac. "The housing market is poised to finish the year strong as low mortgage rates continue to fuel homebuyer demand," he said. "Moving into 2021, we expect rates to hold steady but the key driver in the near term will be the trajectory of the COVID-19 pandemic and the execution of the vaccine."
Until then, if you are in the market for a new house with a white picket fence and a peach tree in the backyard, you have rock-bottom rates in your favor to achieve the American dream.
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Read more from Andrew Moran.
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