I said in yesterday’s report that the Central Bank was due for a drastic rate hike. Finally, with an increase by 300 bps, the CBRT decided to continue with the Late Liquidity Window “nonsense”.
Having missed multiple opportunities for “policy simplification”, the CBRT showed everyone that they have been interfering with the level since the election excitement began through a total 375 bps hike. CBRT has first tried to prevent dollar from hitting 4, 00, and now trying to stop it before reaching a level of 5,00.
It’s just like showing your hand to the opponent when playing cards. Now, all the players in the market know that the CBRT would make a move when the parity approaches towards psychological levels, and they take their positions accordingly. Also, it is quite easy to read CBRT’s “What shall I do now?” sort of hesitations as it has failed to do what should have been done when the time was right. In other words, the CBRT shows its hand and lets its emotions show.
Although I’m sure that many supporters of rate hike will oppose this but let it be known that the reason behind high exchange rates was not the fact that interest rates remained comparatively low. A number of reasons were lying behind it, including chronic current account deficit, high external debt, lack of coordination between monetary and fiscal policies, and high inflation. That is to say, low interest rates were definitely not the main reason. Also, the fact that the amendment to Act No. 32 governing the Exchange Regime is not clearly understood as well as the fact that no one knows for sure who is the real captain steering the wheel of monetary policy were among the main causes of high exchange rates.
Obviously, a decline in USD/TRY may be expected following this rate hike. However, exchange rates will continue to climb up if the underlying causes are not eliminated.