We need an unwavering touch
▶ Now confidence is twofold: residents and overseas investors are both to be convinced after a strange monetary policy stance nobody understands. Moreover, the unsustainable policy mix lasted 18 months so far.
▶ Because people think ‘real inflation’ is higher than the ‘official inflation’ it is meaningless for most households to try to calculate what the real interest rate can be, given expectations. It is also difficult to form realistic expectations about the future path of inflation.
▶ Rather, people tend to make a wager on how much the Lira can or will depreciate going forward, and whether they should stick to Lira assets or switch again to hard currencies. It all depends on the outcome of the elections.
▶ Clearly, house prices can’t increase forever. The last 12 months’ house price index increase stands at 131%. This is huge, and rents went up in tandem as expected. Car prices are being ‘adjusted’ every month.
▶ These two obvious choices may have run their course. Suppose you have saved X amount. Would you buy dollars and wait? Would you try to benefit from TL deposit rates that went up a bit in the last couple of months? Would you buy property instead?
▶ For high net worth individuals it is about protecting the purchasing power of their assets given their needs. They may under any circumstance keep at least a god part of their savings in FX-denominated assets. For SMEs and larger firms, they are either FX-indebted or they have to keep part of their working capital in dollars because they import in order to export etc. De-dollarization isn’t an option for them.
▶ For overseas investors what matters is the exchange rate risk they incur. Otherwise at whatever level they stand now TL rates are anyhow much higher than dollar or euro interest rates. Inflation isn’t the concern of non-residents.
▶ The unwavering touch should be kept intact for a foreseeable future because this is the only way credibility can be restored and CBRT reserves are slowly replenished. An experienced economic team that will restore confidence is a must.