Despite the persistent weakness of the lira, the recent meeting of the Central Bank of Turkey ended without new decisions. In the accompanying statement, the monetary watchdogs confirmed the goal of continuing the „underlying trend of declining inflation“. However, a negative real interest rate in the 3.5% range combined with a depreciation of the local currency of almost 9% since the beginning of June against a US dollar that is not exactly bursting with strength at the moment make such lip service appear anything but credible.
By exercising restraint, the Turkish central bank has missed another opportunity to regain market confidence, improve the transparency of its monetary policy and rehabilitate the official key interest rate in its steering function for the financial markets. The central bank has officially kept the one-week repo rate constant at 8.25% since May. However, for some weeks now it has been providing domestic financial institutions with liquidity primarily through overnight transactions, which at 9.75% are much more expensive. As a result of this „restrictive monetary policy through the back door“, the average refinancing costs of Turkish banks, as well as money market rates, have clearly moved northwards from the official key interest rate.
The Turkish Lira remains vulnerable even after the key interest rate decision of the responsible currency guardians. At present, the central bank still seems to be confident that the price pressure will ease as the corona-related challenges subside. It is therefore attempting to counter the depreciation of the currency with (at least actually) rather short-term interest rate policy measures. This approach, like the use of the dwindling currency reserves, may indeed be sufficient for some time to prevent the Lira from falling further. However, should the propagated decline in inflation not materialise in the foreseeable future, the central bank will once again be faced with a groundbreaking decision. Either the guardians of the currency can resist a further significant depreciation of the Lira and adjust the official key interest rate noticeably upwards, or they will shy away from such restrictive measures in order not to incur the displeasure of the President and put their own jobs at risk. In any case, the chairman of the central bank, Uysal, should not rely on support from Erdogan, who continues to make no secret of his demand for lower interest rates.