Currency experts were optimistic last week. The Turkish central bank had agreed to meet again on Thursday and most of them seemed to have agreed that the key interest rate would be raised that day. It should go up by 1.5 percent, then to 11.75 percent. An overdue move, said investors. They had previously invested heavily in Turkish companies on the stock exchange and raised the leading index BIST 100 by 11.5 percent.
But everything turned out differently: surprisingly, the central bank CRBT did not raise interest rates. There is an internal political conflict behind this. President Recip Tayyip Erdogan wants low interest rates to stimulate the domestic economy. The central bank would rather raise rates to attract foreign investment. The result is a patchwork quilt. In September the CRBT had raised the key interest rate by two percent to 10.25 percent, now a consequent second step was not taken.
The central bank of Turkey is not really independent
The consequences can be seen in the currency market. The lira has fallen in value by around three percent since Thursday noon. For the past three months there is now a minus of 15 percent, last year it was 34 percent and in the past five years even 70 percent. The stock exchange in Istanbul also collapsed again under the unexpected news. The leading index BIST has lost around three percent since Thursday, but is still in the plus compared to the beginning of the year.
Turkey’s currency problems are not solely to blame for the dispute between politics and the central bank. But the differences of opinion reinforce a general trend. In the Corona crisis, many international investors are increasingly relying on safe currencies such as dollars and euros instead of the currencies of emerging countries. For them, the risk is too high for them in the crisis that the economy could collapse here with high numbers of infections and thus suffer losses.
With a decline of 30 percent since the beginning of the year, the Turkish lira is not even the weakest currency of the year. The Brazilian real has lost around 32 percent since New Year’s Eve. For the Argentine peso it is 28 percent, for the South African rand and Russian ruble 23 percent. The Mexican peso with minus 15 percent and the Indian rupee with minus 8 percent are doing much better. China’s renminbi yuan has barely depreciated.
Erdogan always creates new sources of fire
Turkey is also weakened by foreign policy skirmishes. In the Mediterranean, a dispute is raging with Greece over sea zones and access to natural gas deposits suspected there. The government took on France after President Emmanuel Macron had defended freedom of expression in relation to caricatures of the Prophet Mohammed. Erdogan had declared Macron crazy about it.
The US continues to threaten Turkey with sanctions because the Asian country wants to buy a missile defense system from Russia as a NATO member. Here, too, Erdogan is unwilling to compromise: yesterday he challenged the Americans to sanction his country. In addition, Turkey is involved in the newly inflamed conflict between Armenia and Azerbaijan over the Nagorno-Karabakh province.
Nevertheless, it is quite possible that the current sell-off of the lira is just an overreaction from investors who are simply disappointed because of the lack of interest rate hikes. This is supported by the fact that the so-called RSI indicator is now over 70. It indicates on a scale from 0 to 100 how many people are trading a stock or currency. A value above 70 is considered “too much sold” and indicates that many buyers may return soon.
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