Inevitable rate hike and its negative effects

Global markets are being determined by expectations related to the U.S. Federal Reserve Fed’s rate decision. Because of the expectation that rate hikes will be delayed for a while, emerging countries’ local currencies, including the Turkish Lira, are gaining value against the dollar and the euro. However, it is also known that there will be an end to the delay, and even if it is delayed for a couple of months, rate increases are inevitable. 

I think international markets are so fed up that they have priced in the expectation of a delay in the Fed’s rate increases in an exaggerated manner. They will try to maintain these efforts until year-end balance sheets, but it appears difficult that they will maintain it that long. 

One of the most important reasons the Fed interest rate increase has been delayed is that worse-than-expected developments have occurred in China’s production. Even though Fed spokespeople said it would not affect them directly, they have also admitted that the fall in global production, primarily in China, has affected the rate decision.     

The delay in the Fed’s rate increases is regarded as a positive development for developing countries. The cause of this delay is China’s production and at the beginning of the week, this production started to grow again. In other words, China, which has decreased interest rates a couple of times to avoid risking production falls, has started seeing the result of this move. While third-quarter figures turned out to be better than expected, the probability that China may reach its 7 percent growth target this year has risen.   

In light of these factors, it is now being suggested that because of the production increase in developing countries, the probability of the Fed increasing interest rates will increase again. In other words, the market has begun balancing itself and the inevitable Fed rate hike has appeared on the horizon again. 

In a survey among bank executives conducted by the Financial Times, it emerged that two-thirds of participants expected the Fed to start increasing rates by the end of the year. The expectation that it will start in December, not October, is dominant. 

How will Turkey stand? 

As in all global economies, including Turkey, markets have a tendency to buy the good. To close the tough year of 2015 in the best way possible, we see that even domestic political developments are regarded positively. Following the Nov. 1 elections, this time everybody believes a coalition will be formed and this belief is included in the prices at the moment. 

Thus, domestic markets are best evaluating the global climate and acting as if they have seized opportunities for positive developments. 

Even if delayed, it is inevitable that the Fed’s rate increase will start and with this, local currencies such as the lira will start losing value, especially against the dollar.  The markets also know this and are engaged in an effort to “make hay while the sun shines.”

The political uncertainty and the conflict atmosphere that distinguished Turkey from the others looks as if it will again be a determinant when the Fed rate hikes begin. If the forming of a coalition is again blocked after Nov. 1 elections, then it may be inevitable that the lira will lose more value compared to other currencies because that period will apparently coincide with the start of the Fed rate hikes.