Fed decision to be desperately accepted
The most important piece of news of this week, which has become a critical one for the markets, is the Fed decision to be released March 18. Actually, the words used in the statement will be more important than the decision.
Turkey had gone through an intense interest rate debate, but in the end all sides agreed an interest rate cut cannot be made at such a time. This incident has shown once more that the Central Bank cannot make decisions independently, but the markets focused more on whether there would be a return from the mistakes that have been made. Ultimately, there was an involuntary consensus and the interest rate cut was given up.
Now markets are all ears for the Fed. Even in the coffee houses of small settlements in Anatolia, the talk is the Fed decision and whether or not the word “patience” will be in the text of its decision, because at this point, an extreme increase in the foreign exchange rates has started affecting everybody. Not only market experts but a very wide segment of Turkey has begun monitoring the Fed’s decisions.
There are several predictions for the coming Fed statement. Many predict the word “patience” will be omitted and interest rate hikes might start before June. If the word “patience” stays, in other words, if an increase in the rates will not be seen for a while, then there is not too much of a problem; moreover, markets might even recover slightly.
However, if there is a statement indicating interest rate increases would start before June, then it is inevitable the foreign exchange rates would climb again. Especially the dollar, like past weeks, will move sharply.
High reserves could have curbed
Not only Turkey, but all developing countries, especially the ones that have a capital deficit like us, will be negatively affected if the Fed backdates rate increases; their national currencies will devaluate rapidly.
I do not know about other countries’ preparations for this probability, but there is not too much Turkey can do. Even cabinet ministers admit to this desperateness. At the Uludağ Economic Summit last week, Finance Minister Mehmet Şimşek, when asked what would be done against the Fed’s decision, replied, “Is Turkey ready for the Fed’s rate hike? Who is? Fluctuations in the markets were inevitable. It happened; it is happening.” Obviously, the economy’s managements have discussed this and accepted there was not much they can do.
Well, despite knowing for a long time that such a period would come, why were no measures taken? Couldn’t there have been some preparation? I think this was a serious mistake by the economy administration. In those periods when liquidity was in abundance, inflowing foreign capital was totally channeled to growth; whereas, a part of the inflowing foreign currency could have been used to raise the Central Bank’s reserves. We know the IMF had some warnings at that time but inflation was not able to be lowered at a time when inflation was not left in the world and also reserve was not collected.
If reserves had been collected, there could have been a weapon the Central Bank would be able to use against sharp forex moves, and both the markets and wide segments of people would not have been this desperate. But now it is too late…