Last week, Turkey's central bank raised interest rates by 200 basis points, a move that exceeded market expectations.
That first day did not make much of a difference, however the impact of the hike decision on exchange rates started to become tangibly visible as of Monday.
The Turkish lira gained value, with the dollar dropping below 7.40 liras per dollar.
As I ascertained from the economy groups whose opinions I requested before starting this column, if it was not for the Christmas holidays, a greater number of investors would have turned towards Turkey, further altering the exchange rate.
It is being said that vacationing investors would not inject capital into the country.
The capital inflow rate, however, is predicted to increase starting Jan. 15.
Yet, this does not mean that we are sold on hiking interest rates.
However, it should not be forgotten that such decisions are taken under extraordinary circumstances.
When the exchange rate rises, this automatically reflects on inflation.
As is known, there is a concept in inflation called the “exchange rate effect.”
The dollar’s exchange rate has a serious impact on present inflation rates as well.
As Turkey has an open economy, as social interest in imported products is high, and as price increases on such goods lead to the “convergence” effect on local products, high exchange rates have a negative impact on our everyday lives.
Our buying power is diminishing; buying an automobile, traveling abroad, buying a foreign-brand cellphone is no longer as easy it used to be. As everyone is individually experiencing this in their own lives, there is no need to give any other lengthy examples.
WILL THE DROP IN THE DOLLAR CATAPULT A TREND TOWARDS TURKEY’S LIRA?
Despite the high exchange rate, people are still buying foreign currency. According to what I have been told, the foreign currency accounts in Turkish banks, including those of foreigners abroad, has reached $260 billion.
This is an all-time record.
Thus, in the recent period, people have made it a habit to immediately convert whatever income they have into foreign currency, and wait.
What could be the reason?
There have been times account holders have regretted sitting on their Turkish liras. For example, when the coronavirus pandemic broke out worldwide in March, Turkey was one of the countries whose currency was hit hardest.
It is clear that those who were caught “in the wrong time and place,” thinking that foreign currency would rise no more, are still struggling to overcome the trust problem. Of course, there are also ambiguities concerning the trajectory Joe Biden will take in relations with Turkey.
Despite the 10 percent drop in the dollar exchange rate in the last month-and-a-half, the lack of relaxation in banks’ foreign currency deposits is quite interesting. The circles I have been following predict that this will gradually start to change. After all, since there is no other option for those with capital to act based on a profit-loss calculation, foreign exchange deposits will inevitably unravel as the dollar continues to drop. In other words, those who have been regretting sitting on their liras may lose twice as much this time, since they will have to endure the cost of keeping deposits in foreign currency.
ONGOING FOREIGN EXCHANGE INFLOW FROM ABROAD DROPPING DOLLAR EXCHANGE RATE
The same circles are making predictions that interest rates will be stable in the upcoming periods. The opinion presented is that there will not be a “downgrade or hike in the short-term.” This firm stance is expected to continue until inflation follows a downward course. It is said that this may be possible as soon as April 2021, through to summer. Interest rates will automatically start to drop once inflation declines.
The primary reason of the drop in the dollar is the resumption of foreign capital inflow into Turkey. Capital outflow in Turkey during January to November totaled more than $11 billion.
This situation reversed in the last month-and-a-half. Market-friendly messages resulted in a total inflow of about $5 billion. According to reports, close to $2 billion flowed into Turkey last week alone. It can be ascertained that the current circumstances are more convenient for this influx to continue after Christmas.
UPON İBRAHİM KARAGÜL’S DECISION TO RESIGN
We learned that İbrahim Karagül, who has been serving as Yeni Şafak’s editor-in-chief for the last eight years, has decided to resign from this position, effective Dec. 31, 2020. I personally started writing on this column five years ago upon Karagül’s invitation. Hence, I feel indebted to him, and want it to be known that I will feel lifelong loyalty towards him.
Similar to every breath we take, there is, without a doubt, a limit to the duties we undertake, and the work we do. This applies to everyone. We are also aware that there is a certain “nobility” with respect to individuals taking such decisions voluntarily, right?
It is pleasing to know that Karagül will continue to write despite resigning from his position. I wish him a healthy and peaceful life.