You know what they say about being caught in the middle, we are in that situation. We try to find a balance somehow, we look for a solution, but it doesn’t really work…
The issue is the exchange rate and the consequences of a possible increase…
We are faced with such a dilemma that it would not be wrong to use the analogy of between hawk and buzzard.
In order to rein in inflation, we are trying to keep the exchange rate in check, and we are succeeding to a large extent. What I mean by success is not the level of inflation, but keeping the exchange rate, don’t misunderstand!
But holding the exchange rate is like a side effect of medicine. That effect is that foreign investors do not find the current level of the exchange rate sufficient.
We always emphasize that foreign investors want to earn first as they enter, and afterwards when they buy. The way to earn a yield in entrance is to convert the foreign currency into Turkish lira at high exchange rates. If they can’t succeed in this, then they focus on earning as they buy which means yielding at very high interest rates. But for the moment it is clear that foreign investors neither find the level of the exchange rate sufficient, nor the interest rate. From their point of view, and quite rightly, they want the exchange rate to be higher and the interest rate to be higher as well.
USD 1.5 billion net outflows in the first five months
In the first five months before the election, both the exchange rate and interest rates were kept very low. The effect of this has already been seen. In the first five months, there was a net outflow of USD 1.5 billion in equities.
The outflow of foreigners in domestic debt securities was very limited at 42 million dollars. The outflow from debt securities could not have been much anyway, because foreigners did not have any securities they could sell…
USD 114 million net outflows in the first ten months
With the election behind us, both the exchange rate and interest rates started to increase in June. As a result, there were net inflows in both equities and government securities in the second five months. However, the inflow in the second five months is still not enough to compensate for the outflow in the first five months for both equities and government securities. In the total of ten months, there was an outflow of 114 million dollars in these two securities.
The solution is obvious, but it has a side effect like inflation!
Turkey’s need for foreign currency is obvious. The remedy for this is also clear. But the foreigners we expect to bring us foreign currency say, “Either raise the exchange rate too high, or raise interest rates, or both if possible.”
An increase in the exchange rate is the situation we fear the most. Because today’s exchange rate increase means tomorrow’s price increase.
When the exchange rate increases, inflation starts to climb.
And this is quite normal in the current economic structure.
We say we have developed, we have climbed, we have soared, we have become highly industrialized, but our hands are tied against imports and therefore against imported inflation caused by the exchange rate.
We have been on a countdown for how many years to become the world’s largest economy. But what happens is that a currency shock throws us years behind.
Knowing this, we are very afraid of an exchange rate increase.
Especially when there is another election in five months.
Therefore, what will happen is more or less certain. The exchange rate is unlikely to see a big jump until the elections unless something unusual happens. It will go smoothly and we will get through the election that way.
In fact, there is no need to go too far; what happened in the exchange rate before this year’s elections and what happened afterwards will be similar before and after the 2024 elections.
We have no intention of accelerating the exchange rate increase to attract foreigners, that’s for sure. But let’s record once again that, barring extraordinary developments that are out of our control…
If the exchange rate increase will not be too fast, then we are left with only one option: to accelerate the interest rate hike!
It would probably not be a surprise if the policy rate, which was raised to 35 percent last month, is raised by another 5 percentage points to 40 percent at the Monetary Policy Committee meeting on November 23.
If 40 percent is the year-end rate, maybe that 5 percentage point increase will be divided into November and December. But it seems that it will not be possible to close the year with a rate below 40 percent. When the interest rate is 40 percent, will foreign investors see this as enough? Let’s not forget that there is still time for 40 percent if it is realized, and the exchange rate will not stop here until then, it will also increase slightly.
