3 Temmuz 2011 Pazar

Indirect moves to control exchange rate

Despite an official floating exchange rate regime, the Turkish Central Bank is making new moves in the exchange rate arena, according to economists. Worries over ‘hot money’ inflows have trumped inflationary fears, some say
Having cut daily purchases of U.S. dollars by $10 million to $30 million, the Turkish Central Bank could do more, according to economists speaking to the Hürriyet Daily News.

“The Central Bank might halt foreign exchange auctions altogether,” said Banu Kıvcı Tokalı, chief economist at Destek Securities, speaking on Friday. “The bank feels responsibility over the control of currency rates, despite the floating exchange rate regime in Turkey.”

The Turkish Lira has hit its weakest level against the dollar in 26 months last week, partly because of doubts about the Central Bank’s low interest rate policies despite concerns over inflation, accelerating growth and a widening current account deficit. As a first response to concerns, the bank cut its daily foreign exchange buying auctions to $30 billion on Wednesday.

The U.S. dollar closed last week at 1.607 lira, having gained 6.4 percent against the Turkish currency since early April.

Destek Securities’ Tokalı said despite the positive outlook of the economy, the volatility of the current account deficit continues to be the primary challenge ahead of the new Turkish government. The Central Bank aims to keep the Turkish Lira depreciated against the U.S. dollar and the euro “on purpose,” as this would increase the competitiveness of Turkish exporters, she said. According to Tokalı, the lira appreciated in value by nearly 18 percent this year compared with 2003. Despite the bright side of the coin, “Somehow we need to support Turkey’s exports as appreciation of the lira backfires in that sense,” said Tokalı.

The trouble with hot money

Even though some analysts expect an interest rate hike from the current level of 6.25 percent, Tokalı said such an increase is not possible, considering the global economic outlook. “Hot money inflows still pose a serious threat for Turkey,” she said, noting that an interest rate hike would attract hot money into Turkey. According to her, a tighter monetary policy that includes interest rate hikes might even cause “a serious boom” in the current account deficit, which stands at an annual $60.5 billion as of March. The figure corresponds to nearly 8 percent of Turkey’s gross domestic product.

Despite the appreciation of the U.S. dollar, the trend might not continue in the long run, according to Nurhan Toğuç, chief economist at Ata Invest.

Recent economic data from the U.S. point toward a worse-than-predicted situation, Toğuç said. According to the economist, the Central Bank limiting dollar buying is based on the assumption that the greenback might float stronger for some more time. “These measures are closely related with hot money inflows,” she said.
Predicting that nearly $5 billion flowed into Turkey from Persian Gulf countries due to political turmoil, Toğuç said there could be more to come. “Considering the debt worries in the eurozone and clouds over the U.S. economy, the Turkish Lira is still an attractive currency,” she said, adding that the Central Bank could limit buying further.
“The exchange rate needs to stabilize at some point,” said Kerem Alkin, the editor in chief of Bloomberg HT channel. “The risk of inflation pushes the bank to control the exchange rate,” he added.
Annual inflation in Turkey stands at 7.2 percent as of May. According to Alkin, the Central Bank is concerned about the rise in the exchange rate which might trigger further inflation. “Even though the Bank claims that it is staying away from a direct intervention in the exchange rate, indirect practices are in the agenda,” Alkin said.

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