Rate hike ahead as Turkey takes wrong cure
Turkish people are more sensitive to foreign exchange rates than any other important economic indicator. It’s known that as long as foreign exchange rates increase, the wheels of the economy come off; our real income will decline and poverty will become more apparent.
Therefore, recent sharp increases in foreign exchange rates concern us all – and the government first and foremost. Do you recall when we used to brag, saying: “Our public debt is low and the private sector not our concern, it’s theirs?” Those opposing this notion were urgently arguing for the other side, saying: “Don’t say that. Foreign exchange debts are state debts no matter to whom they belong.” Now we’ve seen that you can’t say “not my business” about debt in the private sector.
The government has been taking multiple measures to prevent the real economy from getting pressed for money. For instance, it was decided that public institutions mentioned in decree-law No. 683 announced on Dec. 23 in the Official Gazette would collect their debts on the foreign exchange rate using the rate from the start of the year if the debtor demands so.
That meant the foreign exchange rate was fixed at 3.53 from the start of the year for private companies that owe public institutions – and the dollar exchange rate for the rediscount credits was fixed at 3.70. But the measures did nothing to serve the goal of containing the rise in foreign exchange rates.
It’s kind of wrong, isn’t it? Instead of taking measures that would reverse the rise in the foreign exchange rate, we’ve been pursuing controversial measures regarding their effects on the rate. It seems that we assumed the problem would be solved by curbing demand for foreign exchange when greasing the wheels for debtors. But things didn’t exactly go as planned.
The cure s obv ous, f allowed
The Central Bank of Turkey continues to make decisions within the confines of not being able to raise interest rates. We know that the prevailing trend means rates will have to eventually be raised one way or another.
In fact, this has been done for a while. Here is the final step: From now on the central bank will provide all funding from the late liquidity window at 12.25%. It is an interest rate increase as well, is it not? But these “measures” are not enough. We contracted the nor- mal funding channels and put the late liquidity window in the foreground, but it was not enough. Now we will provide all the funding from the late liquidity window. We also started the Turkish lira negotiated currency transactions and couldn’t achieve the desired results.
Every measure taken is another “confession of a problem.” But these steps do not work so well and reinforce the perception that “the problem is there and the government is seeking measures to solve it.” As the weak measures don’t work, the elbowroom for central bank contracts gradually fades. We are headed for a significant sharper rate hike each time we don’t get results with a quarter- or half-point hike. It will be inevitable. First of all, this step can only be taken if “permission is granted” from the government and when this permission is gained rates will increase
Until then, the burden set to occur will be much heavier.