Expectations on interest rate and foreign exchange rates

Expectations on interest rate and foreign exchange rates

As the dollar has started gaining value in global markets followed by internal political debates, the Turkish Lira’s loss of value has started to accelerate.

Markets, however, are still expecting the Central Bank to continue its drop in interest rates. In relation to that, markets believe the lira’s loss of value will continue.

The tendency to fly from risk has started again and that has led to the outflow of hot money from Turkey as the value of foreign currencies has gone up. Prime Minister Ahmet Davutoğlu’s resignation, followed by the decision to have an extraordinary congress in the Justice and Development Party (AKP), has also played a role in this development. 

Despite their suspicions, markets have not found such a political decision rational and as it was unexpected, the lira’s loss of value has increased in such a political environment.

Uncertainties about the political environment have become less alarming as it became clear that Davutoğlu would leave quietly.

But this time the news as to the new prime minister and ministers that will assume responsibility about the economy have started to influence markets. We can say that the markets are slightly concerned about the fact that there is stronger talk about Binali Yıldırım becoming prime minister and Berat Albayrak replacing Mehmet Şimşek as deputy prime minister responsible for the economy.

The reason behind these concerns is the probability that the rhetoric that the “Central Bank should drop interest rates for investment,” could be put into implementation as public spending could increase tremendously in the period ahead for infrastructure investments in the period ahead.

This expectation is leading to a mood creating anxiety among markets in term of macro stability.

Some bankers say it would not be the right decision for the Central Bank to cut interest rates, yet the expectations are pointing that there will be a 0.50 point cut this month as well.

The interest rates in the liquidity provided by the Central Bank has been going down and what bankers are saying should be seen as a sign of a new cut in interest rates.

Foreign exchange

Some market analyses foresee that the dollar could go up to around 3.05 liras if the Central Bank was to continue to drop the interest rate at a time in which the global risk appetite is decreasing.

A high increase in foreign currency exchanges could further speed the rise in May in inflation, which is already on the upward trend.

All this could negatively affect the banking system and the credit markets that have already become fragile in contrast to the wishes of the government.

All these preferences that were insisted on by a segment within the AKP were prevented by former Deputy Prime Minister Ali Babacan and his team. Now the fear is that these preferences could outweigh the others and be put into force.