Interest rate pressure on Central Bank mounting

There is pressure on the Turkish Central Bank to raise the interest rates, though it is not clear if it will produce a result or not.

The statements from foreign financial analysts insisting on the necessity of increasing the interest rates, probably with a significant margin, come one after another.

It is hard to predict how the Monetary Policy Committee (PPK) of the Central Bank, which decided to keep the rates unchanged in last month’s meeting, will take a stance against the pressure.

Since there will be no scheduled PPK meeting in the upcoming two months, it needs to hold an emergency meeting to decide on an interest rate hike. However, an emergency meeting does not seem likely considering the policymakers’ attitude.

Actually, the effectiveness of a prospective interest rate hike has been under question. Almost everyone agrees that an interest rate hike should be supported by some serious fiscal measures, whereas some suggest that the plunge in the exchange rates should be curbed by an interest rate hike in the first place.

The main reason behind the mounting interest rate pressure is the exchange rate of dollar, which floats at around 5.30, with an increase of more than 25 percent since the beginning of the year.

The factors in the exchange rate surge are pointed as the rising tension between Turkey and the U.S. over the imprisonment of U.S. citizen pastor Andrew Brunson and the renewed sanctions against Iran.

Thus, the domestic banks and brokerage houses do not voice expectations of an interest rate hike that the foreign analysts suggest.

Circles close to the government also agree that not solving the problem regarding Brunson will bring very heavy consequences.

Although there has been optimism in Turkey with expectations of a solution to the Brunson issue, the statements have been very cautious due to the depth of the confidence crisis. Thus, the markets will wait for official statements from the U.S. to be convinced in a solution to this problem.

Personally, I think that the problem of sanctions against Iran will affect Turkey for a long while. As the U.S. has launched the sanctions and stepped up pressure on third countries to halt trade with Iran, Turkey’s energy trade with Iran will come to the table at the beginning of November at the latest. So it can be predicted that Turkey will be caught between a rock and a hard place at that time and the Iran file may again heighten tensions between Ankara and Washington.

Briefly, a decision by the Central Bank to raise interest rates may ease the markets to some extent but it cannot solely end the most urgent problem: The surge in the exchange rates.

A possible solution to the Brunson crisis would also affect the markets positively, but after that the medium term economic program and its contents will be the main determinant on the exchange rates.

Keep in mind that the main factor behind the deterioration in the markets is the disturbance in the macroeconomic equilibrium, particularly in the inflation rates.

If the U.S. insists on sanctions against Iran, this problem will continue to have impacts on Turkey, the markets and the exchange rates.

Everything would be even worse in the event of not solving the Brunson problem with the U.S.