Financial whiz needed to explain Turkish monetary policy re the Lira

newscoop


Joined: 23/12/2007
Posts: 2197

Message Posted:
04/08/2011 15:58

Today the Turkish central bank cut interest rates when the experts were predicting a rise.



Allegedly it was done to stimulate the economy when by all accounts it actually needs to cool down.



A free fall in the currency is expected.



Any comments?

erolz


Joined: 17/11/2008
Posts: 3456

Message Posted:
04/08/2011 16:06

Newscoop, I am not financial wizz, but my undertanding is that Turkey is woried about its negative balance of trade, that it is importing more value of foriegn goods, paid for with foriegn currencies, that it is exporting goods to those countries to earn foriegn currency. Thus it wants to increase the vlaue of its exports and decrease the amount of imported goods Turks are buying. Thus it is pushing the value of the lira vs other currencies down on purpose by cutting interest rates. This will make Turkish exports cheaper and hopefully lead to an increase in overall value exported, whilst also making imported good more expensive and thus hopefully reducing demand and the total value of such goods.

Harold2555



Joined: 19/04/2008
Posts: 1139

Message Posted:
04/08/2011 16:09

i don't claim to be a financial whiz kid either but believe it to be a continuation of this policy



http://blogs.ft.com/beyond-brics/2011/03/04/turkeys-monetary-policy-experiment-under-investigation/







Harold

negativenick


Joined: 10/11/2008
Posts: 6023

Message Posted:
04/08/2011 16:13

more interest rate cuts ahead on savings for the already cash strapped btits.......



Good job no body moved here "cos it was cheap"...........





The MONGERS are going to have to eat soil very soon, apparently.........

erolz


Joined: 17/11/2008
Posts: 3456

Message Posted:
04/08/2011 16:18

If your income is in Sterling or any other non TL currency and you live in the TRNC, then falls in the value of the TL vs the currecny your income is in make you better off not worse off. So if you are an expat here living of say a pension that is in sterling, as the TL gets weaker vs Sterling, you get increasingly more TL to each pound of Sterling pension income you have.

Pugwash


Joined: 06/09/2010
Posts: 1797

Message Posted:
04/08/2011 16:38

I think it is trying to devalue its currency, it has been overvalued for some time, exactly what Greece, Italy et al should be doing but they cant.

newscoop


Joined: 23/12/2007
Posts: 2197

Message Posted:
04/08/2011 16:58

Erolz;



Point taken but surely by lowering interest rates, loans to buy imported goods become cheaper and the already unsustainable balance of payments deficit increases?



Which was apparently already most people's main concern.



Too much money (foreign currency) out, not enough coming in, not a good mix.



An own goal it would seem.

erolz


Joined: 17/11/2008
Posts: 3456

Message Posted:
04/08/2011 19:35

newscoop, again as I understand it they are trying to reduce the impact of cheaper credit by other means, like raising bank reserve limits, as per Harolds link. Even if credit is cheaper and people buy more the hope would be they buy more Turkish made products and less imported ones, as the devaluing of the Lira makes the imported ones increasingly more expesnive comparative to the local bought ones.



Indeed it is the balance of payments deficit (too much foreign curecnty out / imports vs too little foriegn currecny in /imports) that is the primary concern as I understand it. Lowering the value of the TL vs foreign currecnies helps this figure, exports get cheaper and thus increase, imports get more expensive and thus decrease and the gap between the two reduces. China the country with the biggest positve balance of trade for many years now is repeatedly accused of keeping it currency 'unfairly' low to aid this. Turkey is trying to do something similar it seems to me.

negativenick


Joined: 10/11/2008
Posts: 6023

Message Posted:
04/08/2011 19:45

Turkey’s Central Bank has made a surprise decision to cut its policy rate by 50 base points, hike its overnight borrowing rate by 350 base points and introduce daily foreign exchange selling auctions, in an extraordinary meeting it held on Thursday.



The bank’s policy rate was cut to 5.75 percent from 6.25 percent. Meanwhile, the bank hiked its overnight borrowing rate from 1.5 percent to 5 percent.

dougskud



Joined: 04/04/2008
Posts: 356

Message Posted:
04/08/2011 19:45

Hi All it's 2.833 as we speak are we going to see a 3 Lira pound over the next few weeks?



Doug

eager


Joined: 23/02/2007
Posts: 1272

Message Posted:
04/08/2011 19:59

Crikey....really hope not

newscoop


Joined: 23/12/2007
Posts: 2197

Message Posted:
04/08/2011 20:52

Nah! still can't fathom it.



The economy is overheating, too much cash is going abroad, a huge credit bubble is on the way







And they LOWER borrowing costs



It's beyond me, where's Walker Scott when you need him?

deputydawg


Joined: 30/03/2010
Posts: 1727

Message Posted:
05/08/2011 00:07

It seems to me that every time the Lira weakens against Sterling the difference, and more, is immediately negated by higher retail prices. When the Lira rallies the prices are not reduced. Surely, the underlying trend for those who have income in sterling to convert here to Lira face a loss of purchasing power year on year which can only be addressed by increased income/expenditure/change of life style.

Swany



Joined: 01/12/2009
Posts: 255

Message Posted:
05/08/2011 01:50

Why have TL interest rates decreased?



Turkey is committed to low interest rates in order to:

Encourage economic growth.

Promote economic stability.

Increase exports by controlling the currency.

To reduce the trade deficit.



Turkey needs to export more and import less.

Low interest rates

Stop “hot money coming in”.

Keep the TL weaker encouraging exports.

Make borrowing easier.

This could lead to overheating.



Turkey’s Brave Policy



Low inflation.

To allow interest rates to be kept down.

Low interest rates.

To stop “hot money”

To control currency exchange

Higher Reserve Rates.

To reduce available credit to stop overheating.



Will it work? We will have to wait and see.