Being late is the worst, not the interest rates
May 23 was not an “extraordinary” day that saw a move create an exchange rate spiral in Turkey.
However, the dollar/lira rate which was 4.6670 at market opening time hit the all-time high of 4.9282, and fell to 4.5485 at market closing time. In sum, the rate increased 5.6 percent at the market opening, and decreased 7.8 compared to the highest point at the market closing time.
There should have been a major political or social incident for such a big fluctuation but there was not any.
The only but essential question voiced by investors and reflected on the headlines of the international press was “Is there a central bank in Turkey?” The reason behind this question was the Central Bank’s choice to stay back like a bystander until the breakaway point.
The Central Bank held an extraordinary meeting on May 23 to raise the top interest rate from 13.5 percent to 16.5. Again, it used the late liquidity window interest rate to make this hike.
The exchange rate was 4.5419 at the market opening time on May 24 but it increased more than 5 percent later in the day. Thus, the fluctuation went on.
Now the question is: Why did they wait so long until pricing in the economy and financial markets was almost impossible? Why were the economy and the public left to face such a high bill?
The upward trend in the exchange rates is caused by the loss of credibility, especially because of leaving the economy exposed to the exchange rate shock by acting late and still using the late liquidity window, which is actually a tool to meet temporary needs, to raise the interest rates.
The interest rate still lags behind the markets. Probably the Central Bank intentionally decided to lag them behind to steal some time until the ordinary meeting on June 7.
Unfortunately the Central Bank prefers to stay behind the markets instead of taking the lead. It is very obvious that bankers have opted to see the latest inflation data on June 4 and the market reactions before deciding on the interest rate on June 7. Thus, another staying-back is added to the credibility loss.
Although the dollar/lira rate has declined from the panic attack levels the exchange rate pressure continues. Because the investors, who say that it is never too late to mend, the industrialists and traders indebted in foreign currencies and big companies rushed to buy dollars while the Central Bank waited until the rates skyrocketed. Most probably they will not sell the dollars they bought at a high cost because they need them. When you show them how high the exchange rates can climb, any points lower than that will be an invitation to the buyers. That is what happened on May 24.
As the Central Bank was standing idle with hands tied during the exchange rate upsurge, the tension in the economy neared a credit crisis, which is even more dangerous. Getting late in raising interest rates has fueled the sense that fire brigades will always be late and you cannot go back to normal.
The tardiness of the Central Bank has caused a severe damage. The scale of the fluctuation observed on May 23 was not even observed during the times of the floating exchange rate regime. The assumption that the economic units, resembling fire brigades acting on permission, would be late in the event of another fluctuation will always stay in the memory of the markets. That will make pricing more difficult and expensive.
The institutions will get their old strength only when they operate in line with the rules. Therefore normalization in politics and governance is necessary.
It was announced on May 24 that Deputy Prime Minister Mehmet Şimşek and Central Bank governor Murat Çetinkaya will meet with investors in London. It will obviously be a visit to repair the damages. I wonder how they will explain the development in the month left behind.
Turkey’s balance of payments is increasingly financed by funds coming within the framework of portfolio investments. What does the Central Bank, incapable of ensuring exchange rate stability and the dysfunctional economy management, have to tell the investors in London?
Nobody would take the words of a Central Bank which watched idly the melting of its currency during the unprecedented fluctuation seriously. Same for the politicians who sent support messages to the Central Bank after it raised the interest rates only after coming to the brink of a collapse.