Does Turkey’s ‘whisper policy’ hold exchange rates?
From Dec. 4 until the early hours of Dec. 5, the U.S. dollar suddenly lost 10 kuruş against the Turkish Lira.
I immediately recalled those who called earlier exchange rate rises part of a “plot by foreign powers.” What happened? Did those powers give up? Jokes aside, of course there is something else.
When inflation recently hit an all-time record, reaching 13 percent, it was speculated in markets that the Central Bank would raise interest rates.
But there’s a reason for this. For some time, investors in discussions with Ankara have questioned how the monetary policy will react in the event of high inflation.
They have been assured that “interest rates will increase” in these one-to-one meetings. In response to comments “markets will worsen if the interest rate increase is only low,” officials have said vowed to do “whatever is necessary.”
Everyone heard about this. Even analysts who discussed it on a one-to-one basis did not hesitate to write about it on social media. Some even said the increase would be at least 100-150 basis points.
Many investors, analysts, economists and market experts carried on with their business, trusting this “message.” But other economic units were unaware of this.
But when inflation hit its highest in 14 years, together with the speculation that there will definitely be an increase in the interest rates, the value of the dollar lost 10 kuruş against the lira.
Authorities and advisors who believed they could find solutions to the problems in unorthodox byways might have believed that they developed a new technique, “creating an interest increase effect by whispering.”
Central Bank authorities officially do not talk with anyone one week prior to the Monetary Policy Committee (PPK) meeting. This is done in order not to be influenced and also to avoid representatives giving out contradictory messages.
It has been known for quite some time that Central Bank officials have been closely monitoring certain experts who especially speak on economy channels and have been “whispering” to them.
Uninformed investors are affected by phrases like “many experts in the market say.” But those who are real experts believe this is a dangerous game plan.
“With the current inflation and output gap data, the interest rate according to ‘Taylor Rules’ must be 17.5 percent on basis of core inflation,” said one analyst I spoke with.
In other words, it means that if the Central Bank increases its interest rates only slightly, the markets will upend and foreign exchange rates will not settle down.
What’s more, it is not right for the Central Bank to even give a hint of this to the markets before the meeting date. If there is an intention, they can announce an earlier date to the meeting and raise interest rates.
The Central Bank’s “2018 Monetary and Exchange Rate Policy” text, published on Dec. 5, stated the following: “In the coming period, communication policy will be used actively as a supporting method.”
After making a list of basic communication methods, it added this: “In addition, meetings with technical content will continue to be made with investors and analysts, besides regular meetings with investors carried out in financial centers abroad.”
But the Central Bank’s strongest weapon and communication in monetary policies is the price of its own money: Interest rates.
On Dec. 5, both in the inflation note and the 2018 policy note, it was seen that no strong message was given concerning this issue.
A central bank must not head to byways or excuses in an area of duty which is given to them by law such as struggle against inflation. Politicians already do this.
They forget that inflation - taking its roots from the production cost increase which was 2.4 percent in November and 18.9 percent annually - naturally bought a 13 percent increase that does not fit the historical series.
Presenting “food” on its own as its reason and trying to hide behind it does not change the fact that monetary policy is deficient and outdated.
A monetary policy that depends on a “whisper policy” in the backstages by spreading hints that the Central Bank will increase interest rates only shakes confidence in the Bank’s prestige.
Indeed, the increasing tendency among Turkish citizens to hold foreign exchange is a reflection of this.