Not a good time for Turkey
The Türkiye Cumhuriyet Merkez Bankası, or the central bank of Turkey, surprised the markets when it did not raise the one week repo rate at its monetary policy meeting on January 24. Though it did raise the overnight rate by 75 basis points to 9.25%.
The central bank finds itself amidst a crisis of confidence due to this move. This was reflected on the Turkish lira which slid after the decision, and remains the worst performing currency in 2017 thus far.
In order to extend support to it’s troubled domestic currency, the central bank was expected to hike its one week repo rate.
The central bank has taken some measures to start 2017 to halt the plummeting currency. It has reduced banks’ borrowing limits at the Interbank Money Market to 22 billion liras effective from January 11, 2017. It also reduced the foreign exchange reserve requirement ratios by 50 basis points across maturities. This was a liquidity boosting measure expected to add $1.5 billion to the financial system.
However, its efforts have been inconsequential as the currency continues its slide.
Loss in confidence in the central bank
The Turkish government, led by President Recep Tayyip Erdoğan has blamed external factors for the falling currency. The Hurriyet Daily News had reported Cemil Ertem, a senior adviser to the President, talking about a conspiracy emanating from overseas which is giving rise to speculator activities and hurting the lira. He was quoted saying that “There’s an operation going on to quickly devalue the Turkish Lira. This is not a conspiracy theory. It’s a very clear reality.”
However, analysts point to security concerns and domestic factors flagging political uncertainty as being the primary reasons for the decline in the lira.
This decision by the bank not to hike its key rate to reaffirm investor confidence appears to be in response to government pressure not to hike interest rates. The President had an interesting take on the same in a recent interview he had given. Let’s look at Erdoğan’s personal views in the next article.