Turkey's Central Bank to try secondary measures

The Central Bank’s April Monetary Policy Board meeting will be held today on April 22. The fluctuations in the foreign exchange (forex) rates are continuing but the Central Bank is not expected to increase rates to stop this. 

The general opinion in the markets is that the extreme fluctuations in the foreign exchange rates have reached dimensions damaging macro-economic equilibriums and that the loss of the Turkish Lira against the dollar is too high when compared to other countries. Despite all this, the most important weapon to stabilize the rates, which is the interest rate policy, is not expected to be used. 

According to market actors, the most important reason for this is the Central Bank’s avoidance of interest rate increases so that the government is not in a difficult position before the elections. It is being said the Central Bank administration cannot take such a political risk. 

However, markets have started talking in advance that the Central Bank may introduce sharp interest rate hikes after the elections. Market players pointed out that there will be more serious signs in June on the matter of the Fed’s interest rate increase and that the inflow of foreign currency is expected to decrease further. When additional need for foreign currency is added to the already existing need, it is expected that the Central Bank will make quite a high interest rate hike. 

These debates, naturally, affect the credibility of the Central Bank negatively. Bank executives reminded that before the last leap in the forex, the Central Bank had increased the liquidity of the lira to relieve the markets, which in turn accelerated the leap; thus, the Central Bank was acting in favor of the government. In other words, the markets think the Central Bank no longer can act independently.

Despite these factors, we see the Central Bank is arguing that because core inflation has fallen, when the effect of food prices are gone, the inflation rate will decrease into its targeted levels. In other words, the Central Bank, with its discourse also, is giving the signals that there will not be an interest rate hike in today’s meeting. 

Measures to be taken 

Meanwhile, in a Central Bank statement released last week, decisions to be made in the meeting on April 22 against extreme increases in the forex were disclosed. These measures look as if they are not directed to the essence of the business but rather as cosmetic measures. In other words, they will not be measures that are able to stop the movement in the forex. Markets have already bought these measures that were disclosed one week before the meeting. 

April 22, with a decision the Central Bank will make, there will be a cut in forex deposit interest rates, decreasing the costs of those banks that have a shortage of foreign currency and are using temporary foreign currency from the Central Bank. 

However, the practice of interest rates for required reserves in the Central Bank that had re-started a while ago will be strengthened. The interest rates paid for reserves will be raised a little. 

Lowering the cost of the usage of foreign currency may create a relaxing effect to a certain extent but the measure of interest rates for reserves is not expected to have any help in terms of foreign exchange rates. 

The Central Bank may add some more measures to the ones it announced earlier, but apparently all of them will not affect the markets much; they will be secondary measures.