Tuesday’s inflation report from Turkey’s central bank was billed as the big reveal about exactly what is going on with the country’s monetary policy and dwindling foreign currency reserves. But even after its publication, things remain as opaque as ever.
The lira recovered slightly after the bank’s governor, Murat Cetinkaya, said another round of interest rate hikes was still feasible if needed to halt runaway inflation. But if that’s a genuine possibility, then why was a commitment to such a tightening deleted from last week’s monthly statement from the central bank’s monetary policy committee? That removal spooked the currency markets, so it would have been better for Turkey’s credibility with investors not to have done it in the first place.
And while Tuesday’s report did its best to soothe market fears by saying that overall assumptions about inflation remained unchanged (14.6 percent this year and 8.2 percent next), it wasn’t unalloyed good news. The estimate for food inflation in 2019 was revised upward to 16 percent from 13 percent.
The governor also failed to get to the bottom of the foreign currency reserves situation. While acknowledging the “need for further guidance on reserves,” he singularly failed to deliver any such guidance in the press briefing or in the report. Analysts have been questioning whether policymakers have been using short-term borrowings to inflate the country’s foreign holdings, but there was no real explanation offered on Tuesday.
Cetinkaya said the “volatility” in the reserves was caused by the central bank offering foreign exchange “swaps” to its commercial lenders, and that Turkey’s holdings will get a $14 billion boost soon from export credits. But this doesn’t explain why the reserves have fallen so low. While the governor said he preferred to use the $80 billion gross figure for foreign reserves rather than the net amount of just $27 billion, even that bigger number isn’t enough to cover Turkey’s $120 billion of short-term foreign currency debts. This is not a problem that the authorities can just wish away.
And that’s the nub of it; rhetoric alone cannot support the lira. Investors need to believe the central bank is genuinely committed in its inflation battle and independent of interference from the government. Until there is a more credible official response, the obvious loser will be its currency.
By Marcus Ashworth
