The fact that Central Bank hiked rates by 50 bps, instead of 100, wasn’t quite satisfying for the markets. USD/TRY increased almost by 2% yesterday.
In my previous reports, I said that CBRT has strengthened its hand thanks to Fed’s rate hike decision and recently released growth data. However, I never said that a hike by 100bps would make everyone happy. What I mean is that every rate hike might be an excessive load for banks’ balance sheets. So, a 50 bps hike by CBRT should be considered quite reasonable.
Besides, a 100 bps hike would have been distracting not only for banks but also for Ankara. Even a hike by 50 bps attracted criticism by President Erdoğan. As the possibility for reducing exchange rates through a hike in interest rates is diminishes day by day, Governments seems oversensitive about the fact that the cost of funding should remain low. New incentives and supports announced yesterday, including the previous ones, clearly indicate that the public sector needs a substantial amount of funds. The fact that higher interest rates emerges as a threat to the total number of transactions made in Turkish economy may trigger the risks of less income tax collection and ultimately lead to a wider budget deficit.
Despite the concerns, however, Central Bank’s move needs to be interpreted as this: “That’s all I can do”. CBRT said to banks, “I had no other choice. ”, and to international institutions, “That’s all I can do. So, I need your tolerance”.
USD/TRY’s rise up to 3.88 level was not very surprising at all to anyone following this decision as we have already witnessed figures close to 4.00. Besides, I told you before; fluctuations were expected to get sharper after CBRT decision. Sadly, it’s not possible to manage situations where you are not able to do anything that may change the outcome. So, “showing some tolerance” seems like the best solution for now.