Government’s interest rate fixation blows up the risks

The Loss of value in the Turkish Lira, in other words, the upward climb of foreign exchange rates is continuing. It is apparent that in the case in which rates climb further up, starting from the prices of fuel oil, the inflation rate will go up; moreover, the damage already inflicted on the macroeconomic equilibriums will widen.

It is “the government’s fixation on interest rates” that the markets believe to be the most important reason of this negative state of affairs. The fact that the Central Bank cannot act independently of the government causes the government’s fixation on interest rates to directly reflect monetary decisions; and this in turn accelerates the loss of value of the lira. 

Market experts are drawing attention to the fact that despite the excessive climb of exchange rates, savers are not emptying their foreign exchange accounts; on the contrary, the foreign exchange savings are increasing. As a matter of fact, during the times when exchange rates climb rapidly, if the saver has this “it will not go up any further” mentality, they would change their foreign currencies into the lira. The increase in foreign currency savings recently points out to the saver’s expectation that “the foreign exchange rates will go up more.”

The most important reason for this expectation is the Central Bank’s stance to not increase interest rates, despite the current high account’s deficit, despite the rising inflation rates. The fact that the Central Bank’s President Erdem Başçı has declared there will not be any change in the interest rates until the end of the year, and that he still continues to defend the view that “it is possible to pull down the exchange rates by playing with liquidity in the market” fuels the saver’s expectations that exchange rates will continue to rise. 

Central Bank President Erdem Başçı has changed the inflation target of this year three times. The October inflation figures that came two-three days later showed even these targets would not be met. This has caused further decrease in the confidence of the Central Bank’s administration. 

Central Bank’s independence 

The foreigners’ perception is decisive in the market’s trend. Foreigner’s major concerns about the independence of the Central Bank causes the spreading of the fear of “necessary decisions not to be made on time,” hence their reluctant view on Turkish markets. Because of the foreigners’ predominant share both in the stock markets and in the total stocks of public bonds and shares, this view can become decisive for all market movements. 

Meanwhile, Turkey has started to shift negatively again when compared to other developing countries. Banks have reminded that Indonesia has recently decided to increase interest rates, adding, “While it is obvious that the interest rates need to be increased in order to fight inflation, the Central Bank, by not making this decision, is almost fueling the disruption of the markets.” 

Of course, this stance from the Central Bank is causing further questioning about the extraordinary monetary policy it has named “flexible policy” that it adopted for a while in order to not increase interest rates. 

In short, if the government’s fixation on interest rates continues, then economic stability is in danger.