Turkish Central Bank faces tough week under markets’ gaze

ANKARA

The lira fell record low against dollar, while the bonds rose last week, but investors expect the Central Bank to take tougher steps to avoid fluctutations. Daily News Photo, Emrah Gürel

All eyes are watching the course of the Turkish Lira, stock and bonds at the beginning of a post-apocalyptic week, wandering whether the tumult that was prompted with the Federal Reserve tapering plans will settle down or not.

The Turkish Central Bank ended last week on the back foot after a rate rise, and intervention on the foreign exchange market, failed again to halt a fall of the lira and share prices, and a rise of the 10-year borrowing rate.

However, as the investors are still confident that the Central Bank will find a way to push down concerns, the analysts expect the tumble to slow down.

The lira weakened to a new record low against the dollar on Aug. 23, as the U.S. currency surpassed 2 liras. Even the Central Bank’s $350 million forex sales failed to calm nerves about the future of the U.S. Federal Reserve’s massive stimulus package.

The rally in Brent crude oil prices aroused by the political turmoil in Egypt and the shadowy future of emerging markets’ pace in the event of the Fed’s decision to reduce liquidity in the markets have caused jittery investors to draw their money back from the stock exchange of the country as well.

The main share index closed one of its worst performing weeks, in which it lost arpund 8.5 percent value in total, with a 0.54 percent drop to 67,932.32 points.

Halk Yatırım Strategist Işık Ökte said the analysts were not seeing these levels as alarming for sale as the markets were still confident in the Central Bank’s currency policies.

Still, Ökte said the banks were subject to questions as it was trying to avert the repercussion with short-term policies rather than raising the interest rates.

The bank raised its overnight lending rate, the upper end of the interest rate corridor it uses to control monetary conditions, for a second straight month on Aug. 20, hiking it by 50 basis points to 7.75 percent in a surprise move to try to prevent an uncontrolled slide in the lira.

But the financial analysts said that the measures taken by the Central Bank were too complex, and they suggested that the bank may call an urgent policy meeting in the next few days.

Growth dilemma

Despite the Finance Minister Mehmet Şimşek’s recent call for not exaggerating the recent fluctuations, the events of last week demonstrated changes of direction by the Central Bank and a dilemma over growth for the government.

The government has actually modified its tone, since three months ago Prime Minister Recep Tayyip Erdoğan attacked those who argued for higher rates against a background of serious civil unrest seen as his greatest challenge since coming to power in 2002.

Before the Central Bank, statutorily independent, announced its emergency measures including the use of foreign reserves to buy liras, Erdoğan had said repeatedly that the bank would do everything necessary to hold rates down, hoping to sustain growth.

But even then analysts were warning that high growth rates which have propelled the Turkish economy and its ambitions in the region, were unduly dependent on credit and had generated a worrying deficit in the balance of payments on the current account.

The economy was already “fragile” because of excessive credit and the payments deficit financed mostly with short-term foreign funds, journalist Ege Cansen wrote in the Hürriyet daily on Aug. 24, arguing that the expected change in US policy had highlighted chronic problems.