The Turkish Lira will not appreciate further: Başçı

With the international rating agency Fitch’s upgrade of Turkey’s outlook to “investable country” level, the economic management has been focusing on preparing measures against excessive hot money flows.

The flows had already been accelerating before the upgrade, but they may intensify further. In light of this, the Central Bank started taking steps after reviewing examples of countries that were similarly upgraded to an investable outlook.

The first step taken was a statement by Central Bank Gov. Erdem Başçı, saying: “The Turkish Lira will not be allowed to appreciate further.” Upon this statement, issued at the beginning of the week, foreign exchange rates started increasing. If this statement appears to be insufficient in the coming term, then it is expected that the Central Bank will take concrete measures regarding markets. For a while, the Bank has tried to regulate the market with unusual measures outside of classic methods. Its measures on this particular matter will also be unusual. For example, in order to stop the fall in forex rates, it is not expected that the Bank will adopt the classic practice of intervening in the market and buying foreign currency. Instead, it is expected to lower the interest corridor floor as an initial step and increase reserve requirements.

However, we are not at that stage yet. The “verbal warning” the Central Bank has issued regarding forex rates seems to have met its purpose. The fact that after this warning, on one hand the foreign exchange rates increased while on the other hand treasury bill rates fell, shows that the statement was quite effective.

Consequently, it is assumed that the Central Bank will not take any excessive hot money flow measures at the Monetary Policy Committee on Nov. 20. Unless very high fluctuations occur up to that date, it is estimated that the Central Bank will further lower the maximum rate in the interest rate corridor that it launched last month. Nevertheless, some increase in the ratio of Turkish lira reserve requirements in foreign currency, a method that has been resorted to for a long time, may be in question.

One of the most concrete messages Gov. Başçı conveyed for the new term was that “a further fall in the forex rates will be prevented.” It was also important that Başçı noted the inflation rate target was not one digit but 5 percent and lower.

Nevertheless, we see from Başçı’s statements that the administration is quite determined that growth will increase a little in the next term but excessive growth will not be allowed. A growth rate of 4 percent was targeted and, apparently, this target will be maintained.

In other words, it looks as if demands that say, “Turkey has been upgraded to the investable country outlook; the hot money flow has increased; let’s grow more,” will not be allowed. In the same context, domestic demand will not be allowed to increase excessively, for it was announced that this – any increase over 15 percent in the credit volume – will not be allowed.

Indeed, these are technical calculations.

Whether or not politicians will be satisfied with this cautious course will be seen within the next year.