Inaction hurts the Turkish Lira

Inaction hurts the Turkish Lira

It is yet to be seen whether the Central Bank will take any interest rate action, but markets are still hopeful that it will. The economic damage inflicted by the exchange rate due to the Central Bank’s inaction is growing.

Market experts say that “uncertainties are continuing.” Noting that the long-awaited interest rate hike was not delivered last week, bankers say they do not expect much this week. The bankers suggest that it is now all clear that politicians are not allowing a rate hike and that the authorities are willing to wait until the next Monetary Policy Committee meeting scheduled for June 7 without any rate increase. According to the bankers, this means more volatility in the next two to three weeks ahead and local markets will become more sensitive to developments in the international markets. One banker said the exchange rates would fluctuate but their main course would only be upwards. The banker added that if the exchange rates sharply fluctuate in the week ahead, speculations suggesting that the Central Bank would call for an emergency meeting would be circulating around. The same banker noted that because of the Central Bank’s inaction, the interest rate hike has become a pressing issue and added that the markets are expecting the national lender to deliver a rate hike of at least three points and a rate hike below this would be seen as insufficient by the markets.

It has become very clear that the excessive rise in exchange rates, which results from the Central Bank’s inaction, is increasingly hurting economic balances. It is also striking that despite the fact that the U.S. dollar/lira rate reached 4.50, locals’ sale of foreign currencies have remained at low levels. Apparently, even institutional investors keep buying foreign exchanges at this elevated level which suggest that the exchange rates are likely to continue to go higher.


Because of the current level of the currency rates both Turkey’s and private companies’ balance sheets continue to deteriorate. This deterioration will inevitably and gradually hit the banking industry. When I attended the general assembly of the Turkish Union of Chambers and Commodity Exchanges (TOBB) held last week, I personally saw how annoyed the private companies got with the elevated exchange rate levels.

The higher exchange rates have shown their impact not only through prices but also through accumulated burdens. The tax on fuel products was lowered in order not to hike the price of those products, but this will inevitably place an extra burden on the budget. This means that prices will be hiked after the elections because of the exchange rate pass-through which will come on top of public expenditures made due to the elections. The price hikes that will be imposed in the wake of the elections will not be enough, as both the monetary and fiscal disciplines will greatly suffer. This will necessitate large-scale measures to prepare the damages.

Bankers expect a sharp increase in inflation after the elections and note that those who suffered most will be the ones that cannot compensate their losses with their investments.

The Central Bank is among the institutions that suffered the most from the exchange rates. The perception that the Central Bank’s independence has completely disappeared is now widely held, because people think that the bank “would otherwise have already hiked the interest rates.”

Market participants thought that the Central Bank would intervene if the U.S. dollar/lira rate hit 4.3, but now the intervention rate level is 4.5.

To summarize, the markets still believe that at one point the Central Bank will intervene to arrest the sharp depreciation of the lira.

Erdal Sağlam, hdn, Opinion,