The Turkish central bank may further tighten liquidity with Lira sliding again after its biggest gain in five years from massive rate hike, reports Team IFM
Istanbul, January 31: The Turkish lira recorded its biggest gain in five years on the heels of a bumper rate hike by the country’s central bank on Tuesday, only to go into a tailspin the next day and losing all its gains of the past 16 hours.
In the process of its fall, the lira dashed hopes that Turkey had got itself out of an economic turmoil plaguing the markets before the country went to the polls in March. The presidential election is also slated for August.
Thursday morning’s trading saw the lira continue to decline, losing some 1.5 per cent, though it perked up later in the day to hold at 2.27 to the dollar, stronger than the low of 2.39 hit on Monday before the rate hike.
Taking note of the ongoing volatility, Central Bank of the Republic of Turkey on Thursday said in a statement that it would tighten its monetary policy “until there is a significant improvement in the inflation outlook” and that,” if deemed necessary, liquidity policy maybe tightened further”.
Prime Minister Tayyip Erdogan has also been quoted by pro-government newspaper Yeni Safak as saying that the government was working on “a Plan B or a Plan C” and that “an out of the ordinary” stimulus package would be announced in the coming days or weeks.
But doubts linger. As a direct fallout of the uncertainty over the lira in the past few weeks, according to estimates of the Turkish Industry and Business Association (TUSIAD), foreign currency debt of domestic companies have risen between 25-30 per cent, and now stands at about $86 billion, the bulk of it of services companies.
Several companies have had to cancel critical investment plans that could hamper growth, while foreign firms which had previously considering investing in Turkey – for long a favourite investors’ destination – are having a rethink.
And then there’s the uncertainty over Turkey’s political stability. The country is polarised between Prime Minister Erdogan’s ruling Justice and Development Party and Islamic scholar Fethullah Gülen followers, who hold key positions in the police, judiciary and secret services.
Making matters worse was the arrest of sons of three Turkish cabinet ministers on December 17 on graft charges that led to a political crisis precipitating the lira slide.
The Lira Crisis
For long, Turkey has refused to respond to calls for raising interest rates in a bid to protect the lira, because the Erdogan government was publicly opposed to it. In fact, the prime minister told reporters on Wednesday that he was “always against increasing interest rates” but that now that the bank had done it, he would be “patient” for a while.
On Tuesday night, the Turkish Central Bank’s Monetary Committee stunned analysts by upping its one-week repo rate to 10 per cent from 4.5, and its overnight lending rate to 12 per cent from 7.75.
Similarly, the overnight borrowing rate saw a massive jump from 3.5 per cent to 8 per cent.
It was a decision widely hailed. In a statement, I??k University professor Murta Ferman said that the Central Bank was not using the interest rate tool due to the “strict attitude” of the political authorities against the interest rate. “I think that the management of the bank has convinced the political authority within the last one week,” he said.
The lira rallied to a 2.6 per cent gain to the dollar following the rate hike announcement, a superlative performance considering it had lost as much as 16 per cent against the dollar since December 17, the day of the high-profile arrests.
It was not to be; the lira just couldn’t withstand the global ripples of the impending tapering that the US Fed Reserve was expected to declare hours later.
with much of the stimulus that goes into the American economy flowing into the emerging markets including trans-continental Turkey, the cutback spelled bad news for investors.
“Some German companies contacted us recently because they wanted to know what was happening,” Reuters quoted Alper Ucok, head of TUSIAD’s Berlin office, as saying. “We said the trend is not very promising, and there are expectations the lira could weaken further.”
Political Crisis:
In the run-up to the general elections in March and the presidential polls in August, Turkey has witnessed a heightened war of one-upmanship between Erdogan and his opponents who include senior officers of the police force and the judiciary.
It culminated in the December 17 arrest of 24 people, including the sons of three ministers – Economy Minister Zafer Çaglayan among them – on corruption charges. Caglayan and his colleagues have resigned since then. The government has lashed back, sacking or transferring 70 police officials led by their chief.
“Political instability in Turkey still stands as the most complex element of risk,” said I??k University’s Ferman. “The decision of the Central Bank does not solve the medium-long term problems, but it would only reinforce the ground,” he added.