The gap in FX rates widensŌ
of the market is the gap between THE AGENDA the exchange rates (FX) in banks and the market. The gap between the buying and selling prices in banks and the prices in the market has started to widen in the last two weeks. The market price was 5-6% higher than the bank prices. USD/TRY, which is around 19.40 in the interbank market, is over 21.00 in the free market.
The main reason for this gap is that the price is not formed according to the supply-demand balance. The Central Bank has been trying to prevent the FX rate from rising with its FX sales for a long time. It was successful for some time. However, as the election approached and the expectation that there would be an increase in FX rates after the election, the demand for FX began to increase. Some of this demand was met by an interest in FX-protected TRY deposit accounts (KKM). The KKM volume in banks increased by TRY 113.7bn to TRY 1.89tr in the week ending on April 14, compared to the previous week, according to the Banking Regulation and Supervision Agency (BDDK).
An increase of TRY 113.7bn in a week had never occurred before. Some of the demand effectively shifted to foreign currency and gold. The fact that interest rates are well below inflation increases the demand for assets priced in foreign currency. Since the foreign trade deficit is at a record level, the FX inflow to the country is well above the FX outflow from the country. In addition, when it became difficult to get as much foreign currency as you want from the bank due to some restrictions, people and companies started to collect FX from the market. This pushed up the price in the market.
THE FAIR VALUE OF USD/TRY IS 21: IIF
The Institute of International Finance (IIF) published a report on the fair value of USD/TRY.
Robin Brooks, Chief Economist of IIF, stated that the fair value of USD/TRY is 21.00. The report underlined that the upcoming elections have the potential to end the loan-based growth model of Turkey, whose assets lost value. The report read that this would be a positive development for the lira to recover and may lead IIF to lower its USD/TRY fair value estimation.
THE POLICY RATE REMAINS STEADY AT 8.5%
The Central Bank’s Monetary Policy Committee (PPK) kept the interest rate steady at 8.5% in line with expectations. The next meeting of PPK will be held on May 25.
The PPK said in its statement that the domestic demand was more lively compared to foreign demand before the earthquake and an increase in the growth trend was observed. The statement also read that the earthquake is expected to affect economic activity in the short term, but the effect will not be permanent in the medium term.
Another point that stands out in the statement is that the effects of supply-demand imbalances caused by the earthquake on inflation are closely monitored while improvements in inflation are beginning to be seen. The statement also said the growth rate of loans and the meeting of accessed financing resources with economic activity in line with their purpose are also closely monitored.
JUMP IN CONSUMER CONFIDENCE IN APRIL
The consumer confidence index rose from 80.1 to 87.6 month-over-month in April, according to the data announced by the Turkish Statistical Institute (TurkStat) last week. This huge increase of 7.5 points has been seen for the first time since 2015.
The consumer confidence index has been rising sharply since the bottom level of 63.4 in June 2022. Since then, the index has risen by 38%. The high increases in the minimum wage in July and January lie in the background of this performance. The regulation regarding the victims of delayed pension age (EYT) also supports this. Although loan usage has become increasingly difficult in
recent months, the ease of borrowing at an interest rate below inflation is also a factor that encourages consumption. (See graph: Consumer confidence index)
After following a horizontal course due to the earthquake in February-March, the effect of these two months on the index disappeared in April. Ramadan and Eid-al-Fitr also had positive impacts on consumer behavior. (See graph: Sub-indices of consumer confidence)
The election is another issue that we cannot measure clearly but can only make a qualitative estimation. As May 14 approaches, the optimism of consumers, all of whom are also voters, may be reflected on the confidence index. The sub-indices of financial situation expectation for the next 12 months and general economic situation expectation for the next 12 months rose sharper than the current financial situation of the household and the thought of purchasing durable consumer goods sub-indices in April.
SECTORAL CONFIDENCE HAS BEEN FLAT
The seasonally adjusted confidence index increased by 1.1% in the services sector while it decreased by 1.3% and 0.1% in the retail trade and construction sectors, respectively, in April, compared to the previous month.
The services sector confidence index was 116.8 in March and 118.1 in April. While the retail trade sector confidence index was 117.7 in March, it fell to 116.2 in April. The confidence index for the construction sector, on the other hand, rose to 88.5 this month, while it was 88.4 last month.
The Real Sector Confidence Index (RSCI) increased by one point to 105.1 in April, compared to the previous month. When the diffusion indices of the survey questions that make up the index are examined, it is seen that the evaluations regarding fixed capital investment expenditures, export orders in the next three months, total employment in the next three months, and production volume in the next three months raised the index.
Evaluations regarding the total orders in the last three months, the general course of business, the current stock of finished goods, and current total orders adversely affected the index.