Since 28 May 2023, when the Presidential 2nd Round of elections was completed, the volatility in the foreign exchange market continues. Although the change in the economy management from top to bottom leads to different expectations for domestic investors, USD/TL running from record to record. The dollar started the new week with a rise against the Turkish lira.
Closed last week at 25.23 level, Dollar/TL parity entered the last corner of June quickly. The record-breaking exchange rate in the morning has crossed the 26 TL limit as of the moment.
Why Is The Dollar Rising Despite The Interest Rate Increase?
Mehmet Şimşek, the new captain of the economy, has been in charge since the day he took over the seat. “return to rational policies” gives the message. Examining Şimşek’s words, the market expected that the Central Bank would change its monetary policy. Giant investment institutions, which published reports one after another in the past days, predicted that the CBRT would reduce the interest rates to at least 20-25% at the first meeting.
The Central Bank, on the other hand, limited the policy rate to 15% at its meeting last week. Speaking after the meeting CBT President Hafize Gaye Erkan and Mehmet Şimşek stated that the monetary tightening will continue.
Despite the messages given by Şimşek and Erkan to the market, the exchange rates continue to move up. The reason for this rise is based on both past practices and today’s expectations.
Invoice of the Past!
The former economic administration led by Nureddin Nebati and Şahap Kavcıoğlu followed an interesting policy. Despite the low interest rate and high inflation environment, the authorities controlling the foreign exchange market due to the upcoming election left the Dollar/TL parity behind the inflation rate.
We saw historical levels in import figures due to the overvalued Turkish lira. According to the latest data of TUIK, the foreign trade deficit of the last 5 months increased to 56 billion dollars. During the election period, the net reserves of the CBRT decreased to -3 billion dollars.
The new economy management, on the other hand, prefers to follow orthodox policies, unlike the Nebati-Kavcıoğlu duo. The Central Bank, led by Hafize Gaye Erkan, ended the negative trend by increasing the total reserves last week.
Rate Increase Did Not Meet Expectations
After the election, investment institutions expected the CBRT policy rate to rise to at least 20% at the first meeting. However, the new economic management prefers a more gradual transition to tight monetary policy.
Speaking last week, Minister Şimşek stated that this situation is a process. In the text published by PPK members, the message that tightening will continue “until a significant improvement in inflation is achieved” drew attention.
Most of the investment institutions comment that the fair value of the Dollar/TL parity is in the range of 25-27.
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