Turkey's Central Bank keeps low rates amid dollar rally

ISTANBUL - Hürriyet Daily News

The Central Bank held another $150 million worth intra-day foreign exchange auction to keep the rise of dollar against Turkish Lira balanced. Analyts say the bank is watching developments calmly to take further steps. REUTERS photo

Turkey’s Central Bank is currently sticking with its low-interest policy despite the blow its national currency received after the Gezi Park unrest and Federal Reserve worries, but market analysts say it might choose to raise the main rates after seeing the June inflation figures.

First the Gezi protests, which turned into heated tension between the government and the public in Turkey, sparked the exit of a significant amount of capital from the country, then the U.S. Federal Reserve’s announcement signaling it will gradually withdraw its asset purchase program prompted the unstoppable rise of the U.S. dollar against emerging market currencies.

As the Turkish Lira was one of the currencies hit hardest, depreciating by around 3.2 percent since the Fed’s announcement on June 19, the Central Bank – which has been alarmed about the high appreciation of the lira after the investment rating upgrades – faced a problem it was not expecting to see.

“The bank was able to implement its two-prong strategy, regarding stability and prices for eight months when the global conjecture was proper, but the recent developments forced it to change its plans,” Halim Cun, head of Assets Management and Investment Advisory at Gedik Yatırım told the Hürriyet Daily News in a phone interview.

“The bank is having difficulties balancing its interest rate and currency targets under these new circumstances,” he said, adding it was waiting for the currency volatility to stabilize.

The bank opted to use intra-day forex auctions as the means to tackle the rise of the dollar, which broke a number of records within a period of less than a week. The latest record came on June 24, as it climbed to an all-time high at 1.9580 liras. A few hours before the dollar’s record renewal, the bank had said it would only hold one intraday foreign exchange selling auction with a minimum amount of $150 million each day. And it did yesterday as well.

“Currently, the Central Bank is watching the market’s jittery actions from a distance and chooses to intervene in the currency only through forex auctions without touching interest rates,” the founder and economist of Ekinci Economics Consulting (EEC), Şevin Ekinci, told Anatolia news agency yesterday.

Bank confident

In a statement released yesterday regarding the monetary policy committee meeting of June 18, the bank said, “The committee assessed that foreign exchange selling auctions would contain excessive depreciation pressure on the exchange rates under the market conditions and also ease the rapid credit growth by shifting the lira liquidity to shorter maturities.”

But Ekinci said the auctions only stopped the volatility from further deepening, but lira is still weak.
“If the employment data in the U.S. is bright and June inflation pulls the annual inflation forecast over 7 percent, the Central Bank monetary policy committee’s members might consider a limited rise in upper band of the interest rate corridor and in the main policy rate,” she said.

The Central Bank held its monthly rate-setting meeting on June 18 and kept its main one-week repo rate at 4.5 percent, its borrowing rate at 3.5 percent and its overnight lending rate at 6.5 percent.