After the surge in the exchange rate reached alarming levels, the Turkish Central Bank finally held an extraordinary meeting on May 23 and decided on an interest rate hike of 300 basis points.
It is yet to be seen whether the Central Bank will take any interest rate action, but markets are still hopeful that it will. The economic damage inflicted by the exchange rate due to the Central Bank’s inaction is growing.
As the Central Bank delays a widely-expected decision to lift its interest rates, markets are anticipating that the bank will deliver a shaper rate hike. Last week, market participants who were discussing whether a 1.5 point hike would be enough are now talking about a 2-2.5 point rise at least.
The Central Bank that provided additional forex liquidity by using the reserve option mechanism was forced to take new measures aimed at increasing forex liquidity by raising its foreign exchange deposits auction volume.
Despite the decision to bring the elections forward, the markets cannot clearly see what lies ahead.
The Central Bank has revised the inflation forecast that it had set at the start of the year. In its Inflation Report, released on April 30, the Bank raised the end-year inflation forecast from 7.9 percent to 8.4 percent. It is widely believed that the Bank’s revised forecast is unrealistic and it will keep lifting its inflation forecasts.
Deputy Prime Minister Mehmet Şimşek announced last week that conditions for borrowing in foreign currencies have been eased. Those new rules will take effect this week. I personally believe those conditions will be eased further in the period ahead.
The Central Bank on April 25 positively surprised the markets by lifting the late liquidity window rate by 75 basis points.
Central Bank head Murat Çetinkaya made a presentation to MPs on the state of the economy on April 10. Everyone agrees that Çekinkaya can realistically diagnose the growing problems in Turkey’s economy. However, the main issue is not the diagnosis but the cure to heal problems in the economy.
