The key to exchange foreign currency and invest in TRY is to know for sure that FX rates will not rise all of a sudden. But can you know that for sure? Of course not…
Here’s the problem: Those who invest in interest rates have not been paying attention to inflation for a very long time now. The only parameter they care about is FX rates, maybe since the 1990s; because, the biggest nightmare for those who sell their foreign currency would be a drastic and rapid rise in FX rates, which sometimes can be triggered by Central Bank decisions.
That’s why we all have placed our focus on CBRT’s interest rate decision last week after the release of inflation rates. The CBRT will announce its decision on the 16th of the month while the Fed will release its own on the 29th.
I think inflation rates do not allow CBRT to reduce rates to single digit in one go. However, a 50 bps cut doesn’t seem very unlikely, which would mean an opportunity to offer a policy interest rate around 11.50% and 3 bps real interest rate when compared to the year-end inflation target 8.6%. An acceptable rate under the circumstances… If, of course, USD/TRY exchange rate does not go up sharply. Let’s overlook the possibility for now and focus on the Fed.
“Fed might leave rates intact for a while…”
The minutes of the Federal Open Market Committee on December 10-11, 2019 has recently been released. According to the minutes, the current level of interest rates is considered “appropriate” unless major changes happen in the economic parameters, which means rates may remain unchanged for a while.
The minutes say that Brexit and US-China trade tensions seem to have been soothed. According to some Fed members, keeping rates at low levels poses risk to economy as this may disrupt balance both in real and financial sectors.
So, it would not be very realistic to expect that CBRT to slash rates drastically under the same circumstances where even the Fed says no more rate cuts are needed in 2020. Besides, we knew that inflation would decline due to basis effect last year. This year, though, we’ll wait for the announcement of the inflation rate with bated breath every single month.
That is why the key suppliers and demanders of funds should make their next move by taking the facts into account and monitor closely the movements in USD/TRY exchange rate. Any development in FX rates will be crucial for those who converted their TRY deposit accounts to foreign exchange deposit accounts. The conditions are not favourable yet for these investors to turn to Turkish lira.
On the other hand, demanders of funds may risk losing a great opportunity while waiting for interest rates to fall further. That is to say, both savers and borrowers will have to make some critical decisions through 2020. Patience is a virtue provided that it doesn’t stop us from grabbing an opportunity when it comes.