How far can palliative measures take Turkey?
As we know, the Central Bank of Turkey announced a series of measures after the recent rapid depreciation in the Turkish lira (TRY). But these are quite palliative measures. For example, it is planned to sell “negotiated forward foreign exchange selling auctions” with a planned sale of $3 billion until the end of the year.
The official name of the auction is deceitful. It’s not the currency sold there, it’s the sold TRY figure in terms of foreign exchange. The one-, three- or six-month maturity foreign exchange need may cause harm to companies if the foreign exchange rate increases abnormally, it brings a protection to those companies. But we already have the foreign exchange futures market in Turkey for that. This option delays the possible foreign exchange demand that may occur in one to six months when a “forward” transaction is made to- day. (The central bank considers foreign exchange pressure as temporary.) However, companies have to find ‘real’ foreign exchange in the end when it comes to paying their foreign currency debts or importing products and services. (Moreover, if the currency pricing of the auction is calculated below the current interest rates, no doubt it will only return some arbitrage profit to someone.)
The central bank eliminated the banks’ borrowing limits last Tuesday, allowing all funding to be made through the late liquidity window. Thereby, the average funding rate rose to 12.25%, the highest level that could be seen with the current interest instruments in use. However, this was not enough to put out the fire because the funding rate was already 12% before the decision was made. There are still three weeks until the regular Monetary Policy Committee meeting where policy interest rate decisions are made under normal conditions.
The markets keep walking on eggshells both as we came to a ceiling rate with all current instruments and the routine scenarios of “interest rate lobbies” rooting from ruling circles. One of the main reasons for the market to be on eggshells is the US-based trial of Reza Zarrab, which has been postponed to Dec. 4. But I think the markets still didn’t price a possible negative result coming out of that case as prices are still unbeatable. Even with a good result (which is probably a ruling that doesn’t blame any of the current MPs or the Turkish banks) it will be difficult to return to old foreign exchange rate levels.
It is a fact that inflation was already about to go out of control even if we ignore the recent foreign exchange rate movements stemming from recent political developments. The impact of political developments on inflation, which was al- most 12% at the start of November, is probably minimal. This month, it’s likely for us to see another jump in inflation with the rise in exchange rates, the rise in oil prices and the expected rise in food prices due to bad weather conditions. We have also been facing an increasingly rising devaluation problem for about the last four-and-a-half years, as I have tried to emphasize for a long time. The cumulative effects of this situation are piling up.
The average basket rate increase for the last year is 21% above the previous year’s average. This indicates strong inflationary pressure stemming from the exchange rate. Most likely, the expected inflation correction in December and January won’t be realized or will be modest. In the following months, we may see even higher inflation rates due to the base effect. Under these circumstances, I don’t think the central bank has any reason to wait until Dec 14.