It May Be Helpful for TCMB to Act Before Fed.​

Before the expected raise of interest rates by the U.S. Central Bank (Fed), if The Central Bank of the Republic of Turkey (TCMB) takes action to protect price stability and shield the Turkish Lira from extreme levels of devaluation, these actions could be effective in building consumer and investor confidence in terms of economic growth performance. According to the Macroeconomic Evaluation Report, the devaluation of Turkish Lira and the re-election process are suppressing economic growth in Turkey.

According to the Macroeconomic Evaluation Report by Odeabank, established in Turkey as a 100% subsidiary of Lebanon based Bank Audi in 2012, if The Central Bank of the Republic of Turkey (TCMB) takes action to protect price stability and shield the Turkish Lira from extreme levels of devaluation before the long expected raise of interest rates by the U.S. Central Bank (Fed), it could be effective in building consumer and investor trust in terms of economic growth performance.

The report points out that the expectation that Fed will raise interest rates, combined with the re-election process in Turkey after the failure of political parties in forming a coalition government, has resulted in uncertainty, which in turn led to an extreme devaluation of the Turkish Lira, disturbing consumer and investor confidence and suppressing economic growth. In the report, Odeabank Economic Research and Strategic Planning Director Ali Kırali states that it is crucial that TCMB, overseeing price stability, shields the Turkish Lira from extreme devaluation through interest rate and/or liquidity strategies, thus keeping inflation under control and supporting growth while building consumer and investor confidence.

Kırali says: “In spite of all the problems faced by the global economy, the Fed will normalize its monetary policy. As a fact we have been sharing with investors for the past two years, the Fed will begin raising interest rates quite cautiously, proceeding with slow steps. Nevertheless, like the currencies of other developing countries, the Turkish Lira might go through further devaluation in this process”, adding that the Turkish Lira has been going through extreme devaluation because of geopolitical risks and the reaction to poor monetary policies. He states that this devaluation has had a negative effect on consumer and investor confidence, increasing pressure on economic growth performance. Kırali says: “In this process, if TCMB moves towards a more conventional monetary policy and tightens its liquidity policy, this will increase the value of the Turkish Lira. Steps taken in this direction can boost consumer and investor confidence, pushing economic growth forward. Otherwise, we estimate that the devaluation of the Turkish Lira will continue in the remaining part of the year and the negative pressure on economic growth will go on until a strong government is formed.”

NEED FOR STABILITY AND REFORM

The report points out that if political stability is established and structural reforms are made, in the medium term Turkey can again be attractive for investors. The report says: “We think that from mid-2013 onwards the main problem in the Turkish economy has been the visible deterioration in investors' perceptions; and in spite of improvements in global inflation rates, this deterioration has created pressure on the Turkish Lira which resulted in high levels of domestic inflation and interest rates. In this context, if a strong and reformist government is formed that can reshape investors' perceptions, we hope that the Turkish Lira will be consistent with macroeconomic foundations and flow of investment will gradually be restored. Although in the short term, the risks have increased because of internal and external developments, given that political stability is restored and the long-awaited structural reforms are put into place, the Turkish economy, with its well capitalized banking sector and strong fiscal policy, offers significant opportunities for investors in medium term.”​​