Could it be worse?

The trading week starts in the worst way possible. I know that it could be even worse but the situation right now is quite frightening enough, whereas we could have a nice start to the week.

The agreement between Russia and Turkey over Idlib last week had calmed down the markets temporarily. But just yesterday, Monetary and Capital Markets faced some sharp falls and fluctuations. Let me share with your my impressions of the last week before I tackle this issue.

The nine interviews I conducted with real sector professionals and academics last week showed me that people are genuinely concerned. More importantly, those who usually tend to worry about Turkey seemed concerned about the world this time. The fact that gold prices show an hesitant trend while oil prices are sinking to record lows indicate that the risk appetite is gradually diminishing as investors seem more and more confused. As a matter of fact, people are actually thinking the coronavirus-led sales wave that marked yesterday could happen again.

The fact that Italy, one of Turkey’s biggest trade partners, has shut down its northern region of Lombardy and 14 neighbouring provinces to fight the spread of the coronavirus are fuelling increasing concerns. As I have mentioned before, efforts to manage the spread of COVID-19 have led to sea travel restrictions. In the meantime, the world’s largest IPO, Saudi Aramco shares have fallen below IPO price. I do believe that the Fed hurried up and cut rates by 50 bps considering all this panic and the approaching coronavirus disease. Probably, CBRT too will attempt to cut its key policy rate to single digits without paying too much attention to criticism. It will do it not only to help markets but also to take proper advantage of the situation knowing that rates will go up in the future.

“What will Turkish Central Bank do?”

Central Bank will probably cut rates but if exchange rates start rising drastically this rate cut would definitely deviate from its intended purpose; because people in Turkey tend to get upset when exchange rates go up, not the other way around. Besides, big rises in FX rates always lead to higher inflation and market slowdown.

By the way, I really don’t how much longer we can bring the FX market under control with swap transactions but I do know that we would need substantial amounts of Turkish liras to keep performing these transactions. If CBRT decides to print money, then we could face unwanted results due to excessive intervention in the system.

After long consideration of all these available options, I think CBRT should try to be content with 25-bps cuts as it would be the wisest thing to do until a “single digit” perception is formed about the inflation in Turkey. In my opinion, cutting both deposit and credit interest rates further under the current market conditions would bring no good to anyone. Interest rate cuts may become more efficient for everyone if we can be patient enough.