The simple answer is up. Struggling and screaming but UP.
Why do I say this? Well, because the central bank only has two tools in its armoury to bolster the Turkish lira. It can sell dollars and buy Turkish lira or it can raise interest rates to attract investors.
On Monday July 8th, Turkey’s central bank made some huge moves in the market to prop up the lira.
It sold US$ 2.25 billion in reserves and bought lira in an attempt to stop the lira from tanking.
The unprecedented dollar auction in seven instalments was the latest move to support the lira, which rose by less than 1% to 1.9501 after sliding to an all-time low of 1.974 Monday morning.
There was an accompanying vow by Erdem Basci, Central Bank Governor, to embark on “strong monetary tightening” short of interest rate rises, without elaborating on what those measures will involve.
Separately, Mr. Basci also sought to reassure economists at a meeting in the capital that the central bank’s toolbox is sufficient to handle the mounting economic pressure.
Then the central bank sold $1.3bn in foreign currency on Wednesday in a continuing effort to bolster the lira. Nevertheless, the lira weakened, nearing TL1.96 to the dollar.
Turkish policy makers are concerned that a big currency devaluation could lead to a spike in inflation and make it difficult for businesses to roll over international debt.
But their efforts haven’t turned the tide.
The central bank’s aversion to increasing headline interest rates was established well before the protests in Gezi Park last month.
Although the bank is independent, Prime Minister Erdogan has set out a goal of zero real interest rates since 2011.
The Prime Minister has also threatened to “throttle” speculators, accused a shadowy “interest rate lobby” of having manipulated the demonstrations
While the country’s central bank is also formally independent, it has so far resisted increasing interest rates in light of the international retreat from emerging markets, opting instead to sell more than $6bn in foreign exchange, bringing net reserves down to about $40bn.
The central bank is trying to make a stand but people are going to start counting what foreign exchange reserves they have left and what’s liquid. It is running up against a credibility issue.
At this rate it has less than two weeks’ worth of reserves left.