JAKARTA (TheInsiderStories) – Lira, a Turkey’s national currency returned falling one day after the national central bank raised its main interest rate. The Central Bank has raised its benchmark interest rate to 16.5 percent from previous 13.5 percent.
Market sentiment has driven much of the lira’s sell-off, as investors worry about government intervention in monetary policy. The U.S dollar has appreciated by around 18 percent against the lira so far this year.
Several analyst says Turkey’s economy is going overheating if the government has no intention of tackling the imbalances. The next meeting of Turkey’s central bank monetary policy will take place on June 7.
The economists are calling on the central bank to hold an emergency meeting before that date in order to implement a sharp rise in interest rates before it is too late to have no effect whatsoever.
Turkish President Recep Tayyip Erdogan recently said that he would impose more control over financial policy after the June 24 elections. His statement is increasingly deepening market concerns about the ability of the central bank to cut inflation which has now reached double digits.
Previously Fitch ratings has expressed concerns about the central bank’s independence regarding Erdogan’s remarks. It said, Erdogan’s statement to have a greater vote in monetary policy if he wins the June election increases the likelihood of the country’s economic policies becoming more unpredictable after the vote.
Fitch, like other global rating agencies assessed Turkish debt goes into junk status alias junk. Fitch warned that the erosion of central bank independence would put “further pressure on Turkish foreign debt credit profile.”
On March 30, the International Monetary Fund (IMF) welcomed Turkey’s solid economic performance last year, driven by strong policy stimulus and favorable external conditions.
At the same time, Directors noted that rapid growth has contributed to economic overheating, in the form of widening internal and external imbalances, including a positive output gap, high inflation and a wider current account deficit.
The directors noted that large external financing needs, limited foreign exchange reserves, changes in investor sentiment towards emerging markets, and persistent domestic and geopolitical risks also pose challenges.
Noting that the economy has been resilient thus far, IMF emphasized that, looking ahead, macroeconomic policies should be geared towards addressing the imbalances, lowering inflation, and strengthening buffers. In addition, comprehensive structural reforms will be necessary to boost Turkey’s growth prospects.
The agency called for front-loaded monetary tightening to help contain inflation, re-anchor expectations, underpin the Lira, and allow reserves to be rebuilt. IMF agreed that moving over time to more conventional monetary instruments would help underpin the transparency and effectiveness of monetary policy. The board underscored the importance of central bank independence.
Monetary policy has been tightened but inflation rose to almost 12 percent during 2017. The central bank increased the effective cost of funding to banks by almost 500 basis points since November 2016 to contain inflation spillovers from the large Lira depreciations in the last quarters of 2016 and 2017.
The ex-post, real effective policy rate has, however, remained close to zero until recently. The size-able expansion of state loan guarantees was the main driver behind the acceleration of bank credit growth in 2017, although the relaxation of macro-prudential measures also contributed.
Commercial loan growth has since moderated, as the impulse from state loan guarantees fell towards the end of the year. Bank capital levels remain high, although some buffers are decreasing.
Higher profits improved capital adequacy in 2017, reflecting in part the relaxation of prudential norms and the conservation of capital through the use of state loan guarantees. The headline non-performing loans ratio remains low, but a broader definition of loan impairment signals emerging loan quality weakness and signs of difficulties in some large corporate borrowers are emerging.
In 2018, economic activity is expected to decelerate to close to 4.5 percent. Continued accommodative monetary, fiscal, and financial policies will support growth, but inflation is projected to remain well above target and the current account deficit is expected to remain elevated.
Following the two highlights showed we believed if Erdogan’s government not taking the right policy to tackle the rout is possible bring the country to the crisis era. But if the government could combine Turkey’s growth rate higher with a low interest rates and massive government stimulus will reverse the situation.