Market forces Central Bank to raise interests

The Central Bank has not increased interest rates for a long time despite the demand of the markets; however, developments experienced in the short term capital exit, the increase of the domestic demand for foreign currency, together with the upward tendency of the inflation rate are all putting pressure on the Central Bank.

Market players have been saying for a long time a period has started when a global liquidity exit would begin and interest rates should be increased as a precaution. Despite this, the Central Bank did not increase interests; moreover, the corruption and bribery probe was added to this fragile environment, as well as the state crisis that followed it. The Central Bank, despite this increasing vulnerability, again refrained from increasing rates. This situation has been interpreted in all markets as, “The Central Bank cannot make the decision to raise interest rates in order not to trouble the government before elections.”

Now, almost everybody agrees because the Central Bank cannot act independently and does not raise the rates in order not to trouble the government, this situation aggravates the panic in the markets.

Now, the debate in the markets focuses on whether the Monetary Policy Board (PPK) will decide to raise interest rates on its Jan. 21 meeting. More and more market players started saying in this year’s first meeting of the PPK, The Central Bank will have to decide to increase interest rates. Despite that, there are still quite a number of market players who believe the Central Bank will not increase interest rates because of local election to be held at the end of March.

Well, if the Central Bank decides to increase rates on Jan. 21, would the markets calm down? I personally think we are beyond the point where markets would be relieved only by an interest rate increase. Besides, the domestic political fight should stop and confidence should be given to both domestic and international investors. Seeing the current attitudes, we are still very far from the stage of relief.

Pessimism overseas

Only very recently, the world’s giant financial corporations such as Goldman Sachs, JP Morgan and Morgan Stanley warned their investors about developing countries. Goldman Sachs suggested its investors decrease their positions in developing countries with a rate of 3 to 1. Morgan Stanley argued that the Turkish Lira, together with the Brazilian Real and the Russian Ruble will further lose value and conveyed this view to its investors.

For some time, because of their dependence on foreign resources, Brazil, India, Indonesia, South Africa and Turkey have been named the “Fragile Five.” It is expected that developments in global liquidity will seriously affect these countries. We are seeing the consequences of these fragilities already in the value loss of these countries’ currencies for some time.

Turkey’s risk has further increased with the state crisis that erupted alongside with this global change. I think the Central Bank has been quite late in taking precautions against accumulated risks and adopting a more foreseeable monetary policy.