How Şimşek’s London visit helped the Turkish Lira

Following the recent visit of Deputy Prime Minister Mehmet Şimşek and Turkish Central Bank Governor Murat Çetinkaya to London, the exchange rates in Turkey have seriously retreated. Some commentators have said that it was because foreign investors were reassured, whereas others deem the change just as a rebound from the Turkish Lira’s historic lows.

Most of the bankers foresee that the lira can gain strength to 4.40 against the dollar after hitting the record low of 4.92 on May 23. It is believed that the steps taken by the Central Bank to raise interest rates and to simplify its monetary policy has helped the upsurge of the lira alongside the moves in the dollar-euro parity. The bankers also say the Central Bank has made big mistakes which have sent the interest and exchange rates up. If the Central Bank had raised the key interest rate by 175 base points instead of the 75 base points hike, it would not have to make the recent increase of 300 base points, according to some comments. In the mentioned scenario, the dollar/lira rate could be floating at around 4.00, they say.

Nowadays, the bankers find it normal if buyers heighten the demand when the dollar/lira rate hits 4.40, thus they expect the rate to float at around that level. Şimşek said they held very productive talks in London. “Key messages: Policy mix is strengthening. Rebalancing is underway,” he wrote on his Twitter account, stating that their priority is to reduce the inflation rate and current account deficit. The Turkish government will be “firm on speeding up structural reforms,” he added.

Lira gets much cheaper

I have asked a senior banker, who has close relations with foreign investors, how on earth they trusted the most recent positive messages after witnessing such big mistakes made by the Central Bank.

The foreign investors most probably have not been convinced indeed that the budget will be kept in order, the inflation rate will fall, and the necessary monetary policy decisions will be made on time, he said.

Foreign investors have been focused on their future yields, the banker has said, pointing that the depreciation rate year-to-date in the lira is 17.8 percent, whereas it is 1.64 percent in the South Africa rand and 7.88 percent in the Russian ruble. The lira has seen the biggest loss in value among emerging market currencies, which have decreased 6-7 percent on average, after the Argentine peso. Thus, the reason behind the downside move in the exchange rates is that the lira has been very attractive for investors, according to the senior banker. However, the attractiveness of the lira will be short-lived despite the high inflation rate, the banker added, pointing that the Central Bank’s key interest rate is 16.5 point and the interest rate of the Treasury is 17 percent, whereas the inflation rate is expected to hit 14 percent. The banker thinks that the current value levels of the lira can be maintained after the announcement of the inflation data on June 4, only if there are no extra pressures on the currency.

On the opposite side, some foreign experts argue that nominal interest rates are more important than the real interest rates, saying that another interest rate hike should be done if the inflation rate of May is higher than expectations. The above mentioned arguments are all about the monetary policies. Any possible deterioration in the fiscal policies will be taken into account later on.