The US dollar, which had recently been soaring at record levels against many currencies including the lira, has begun to slide following statements from US President Donald Trump
Following a statement from US President Donal Trump in an interview with the Wall Street Journal in January that the “dollar is too strong” against the Chinese currency, U.S. Treasury Secretary nominee Steven Mnuchin also said in recent remarks that an “excessively strong dollar” could have a negative short-term effect on the economy. The dollar extended declines after Mnuchin’s remarks, falling to its lowest in the preceding six weeks. These developments have unexpectedly come to the rescue of the Turkish Lira, which is experiencing its weakest period in history and which has slipped most against the dollar among all developing currencies. At some point, the dollar reached to a level as high as TL 3.94, mostly owing to the failure of the Central Bank (CB)– which is under immense pressure from politicians — to take the harsh measures the markets had expected as well as to increased political and security risks in Turkey. After this, the rate stabilized at TL 3.75 – 3.83 following measures introduced by the Central Bank, which were criticized as being stopgap measures.
Interest rate corridor again
However, those measures taken by the CB weren’t enough to fend off harsh fluctuations in TL, that could range between 5-8 kurush in a day. In a monetary policy meeting on January 24, out of which the markets hoped to see a harsh rate hike, the CB took a complicated decision which was deemed as “insufficient yet better than nothing.” This is exactly why the dollar rate, which had fallen to TL 3.76 ahead of the meeting, soared to TL 3.83 after the meeting. Yet, the rate slackened to the pre-meeting level shortly after the markets made sense of the decision. The Central Bank did introduce an interest rate rise, emphasising the increase in inflation. However, it did that in such a way that the interest rate will be 11 percent at certain times and 9.25 at other times. To put it more clearly, the Monetary Policy Committee (MPC) kept the rate unchanged at 8 per cent, while increasing the overnight lending rate 75 basis points to 9.25 per cent. The MPC also raised its late liquidity window lending rate, which is increasingly used by banks that are not receiving adequate funding at the cheaper repo rate earlier in the day, by 100 basis points to 11 per cent.
Unlikely to end concerns, but might alleviate them
As a result of this, the rate will be 11 percent on those days when the CB uses the late liquidity window, and it will be 9.25 percent on the days it doesn’t. In a sense, an interest rate corridor has formed not unlike the one that existed under former Governor Erdem Başçı. But does that spell an end to the “simplification” approach monetary policy that came about with the new CB Governor Murat Çetinkaya taking office began? Most economists think that the CB’s decision does not satisfy the markets or expectations. In other words, it is a decision that will likely alleviates concerns about the rate, but not one to end these concerns.
Unnerving reports
Reports on the Turkish economy prepared by various internationally significant organizations also contribute to keeping worries about the course of the lira alive. For example, Simon Knapp of Oxford Economics in London in a recent research report ranking 13 developing markets, says that the seemingly opposing outlook for growth and inflation rate is harming the Turkish economy. Commerzbank AG senior economist Tatha Ghose has said a larger rate corridor has increased the Central Bank’s flexibility, but noted that such flexibility is unlikely to help the lira. Ghose said the weaker dollar since Trump’s inauguration had more of an impact in stabilizing the lira, and that Turkey’s effective rates will need to reach 11 percent this year to tackle inflation.
