Earlier today, Erdem Basci, head of Turkey’s Central bank predicted that interest rates would not rise for the rest of this year. “The top interest rate will not exceed 7.75 per cent” he stated.
This statement directly contradicts my prediction, which in my previous article, was a 10% interest rate, but I will wait a while before I eat any humble pie.
Mr Basci instead said that he would instead be using Turkey’s foreign exchange reserves to battle its slide against the US$, sterling and the euro.
I can understand the pressure he is under to keep interest rates rising even further. Though his post his nominally independent of the government, it is no secret that Prime Minister Erdogan loathes any interest rate increases and has been saying so, loud and clear.
Presumably, this dislike of rising rates is heightened for Mr Erdogan, who faces local elections next year and general elections in 2015. He will do anything to try and keep growth rates up around the 3 to 4% level. Though these are half of what they used to be a few years ago, they may still provide some satisfaction to the electorate.
However, Mr Basci has a problem. His problem is that with only $40 billion of net reserves, he does not have the firepower to fight the world finance markets. He has already used up $8 billion of reserves over the last three months but has had to watch the Turkish Lira slide to record lows against the dollar, sterling and the euro.
Markets just do not believe him and bond rates for example are already over 10%, irrespective of the ‘official’ rate of 7.75. The stock exchange is also taking a hammering falling a further 3 today after a 9% drop last week.
The Lira continued to slide against major currencies both during and after his speech. In fact the dollar has breached the TL2 to the dollar as I write.
So I will hold off on that slice of humble pie for a little longer. There is plenty of time for Mr Basci to eat his words!