Oil prices alone are not enough for optimism in economy

The positive atmosphere created by the low course of world oil prices did not last long. Following positive data about the U.S. economy, the possibility of the Fed moving forward interest rate increases has shattered the optimism brought by oil prices.

As a matter of fact, due to the new climate, the view of foreign funds for Turkey had turned positive because of the expectation that both the current account deficit and inflation problems would ease.   

When the possibility of Fed moving forward the interest rate increase emerged, the euro and all national currencies started losing value against the dollar. In the first day of the week, the Turkish Lira started climbing again against the dollar and the possibility of it to reach 2.30 occurred. Upon this, the Central Bank stepped in and decided to re-increase the sale of foreign currency to the market, as well as restricting the amount of money released. 

Upon the downward trend in the dollar exchange rate, the Central Bank had decreased its daily foreign currency sale amount from $40 million at the beginning of December to $20 million. However, upon recent developments, the Central Bank, after less than 10 days, had to announce that it would again sell $40 million daily. The Central Bank cited “the need to take action against the mobility in the foreign exchange rates” as the reason for this decision.

The Central Bank’s move was not limited to this. On Dec. 8, it provided a resource of 3 billion liras for banks in return for 5 billion lira repo to the market. Thus the Central Bank compacted the lira’s liquidity in the markets by 2 billion liras. The Central Bank encouraged the banking system to turn to loaning through the overnight loaning interest rate, which is higher than the 8.25 percent weekly repo interest rate. Primary dealers had to borrow their need of approximately 3 billion liras by the overnight borrowing interest rate of 10.75 percent.

Interest rate reduction

In other words, the de facto interest rates in the market have been raised. Whereas, it was only last week that because of the positive atmosphere and the expectation of an increase in short-term capital inflow, exchange rates went down and interest rates in the market declined. This positive atmosphere increased the expectation of the decrease in the benchmark interest rate in this month’s Monetary Policy Council meeting of the Central Bank. Even if there is no decline in the benchmark interest rate, the expectation of 0.50 points decrease at the top limit of the interest rate corridor was spreading.
We do not know how long this new atmosphere will stay, the one that started turning the opposite way around last weekend, but the markets will find a new direction depending especially on the interpretations and economic data coming from the U.S. 

When it was seen that the positive atmosphere can change all of a sudden, the expectation that the Central Bank would reduce interest rates also began falling. In the case that foreign exchange rates maintain a high course all though the week, as long as the Central Bank continues to restrict the lira in an effort to curb the demand for foreign currency, this expectation may disappear altogether.

In short, the low course in the world oil prices is not solely enough for the positive atmosphere to stay.

While this last move has shown us once again the dependency of global markets to Fed decisions, it has also revealed how unprepared Turkey is caught in these developments which had been expected for a while.