As USD/TRY remains stable between 3.86-3.89, parity’s move in favour of Euro has prevented it from hitting a level of 4.00. However, I took a look at the currency basket as I always do, which is the “1 Dollar + 1 Euro / 2” formula.
When you sum up the values of these two currencies against Turkish lira and divide it by two, you can see that the duo keeps hitting record highs. In short, there’s a hot demand for currency in Turkey, no matter what the parity stands. And it’s getting hotter.
Benchmark interest rate is about to touch 14%. This time last year it was around 10%. When we take a look back five years ago, we can see that it have risen at a considerably faster rate. The situation cannot be explained merely by high inflation rate. An explanation, however, is needed especially in an economic climate where cause-effect relationship is rapidly breaking down.
Firstly, the “Yeah, interest rates are high but inflation doesn’t go down either” statement doesn’t reflect the truth. That’s because you will easily lose control if you don’t hike rates when the need arises. Exchange rates, inflation, costs go up respectively. And eventually, inflation rate climbs higher and higher. As a result, interest rates rise automatically. Besides, they will keep rising as Government continues to hike tax rates, and public sector continues to collect domestic debt and all savings. As inflation remains unchanged due to wrong agriculture policies, high import duties etc. an outsider looking in Turkey would say the following:
“In Turkey, inflation rates are high, there’s public deficit. As for the current account deficit, it rises continuously. If we sell our dollars and buy TL currency we would definitely lose money when exchange rates pick up speed. It’s difficult to invest in here without a satisfying interest rate.”
There you have it! Sometimes, to understand within, we need to look outside ourselves, instead of standing on the inside looking out.
By the way, interest rate is an integral part of costs, obviously. It certainly brings impact on prices. We are aware of the fact; however, interest rates alone are not enough to take the inflation under control as they are not the primary reason for Turkish inflation.
“Let’s say that CBRT hiked rates. Would it help soothe exchange rates and inflation?” To tell you the truth, I’m not so sure anymore. Turkish economy was pressed for money before. At the times, both exchange and interest rates did go up. The same thing could happen again.
I think, from now on, economy has a chance of improvement provided economy officials weigh their words before they speak and Government officials restrain from any move that may lead to further escalation of tensions between foreign governments. Considering Turkey, a country with huge savings gap, is in desperate need of fund flow, it better prepare its weapons: a brand new and convincing story, and a foreign policy which can deliver the right message about the “future”. You should know that “stability” alone won’t be enough to attract investors.