Lira slumps on Chhibber warning, Central Bank urges calm Turkish Daily News April 23, 2002
By Elif Kelebek Central Bank sources said they were expecting a sudden volatility in exchange rates to be short-lived, after the lira slid against the U.S. dollar yesterday over a competitiveness warning from the World Bank. The lira hit intraday lows of 1,323,000/1,325,000 in the interbank market yesterday, compared with Friday's close at 1,302,000/1,305,000 after World Bank Turkey director Ajay Chhibber warned that the thawing competitiveness of the real exchange rate has become a problem. The U.S. dollar eased to 1,320,000/1,321,900 after the initial bounce later in the day. "The real exchange rate has reached now pre-crisis levels and at some point this is going to begin to hurt exports, tourism," Chhibber was quoted as saying in an interview with Reuters newswires. Analysts say the lira is substantially overvalued against the U.S. dollar, which is feared to hit Turkey's export-led recovery hopes after a 9.4 percent contraction in gross national product (GNP) last year. The foreign currency market responded to Chhibber's remarks in anticipation of a new Central Bank short-term rate cut, which could make lira assets less attractive and trigger an outflow. The Central Bank has lowered its key overnight borrowing rate by nine percentage points to 51 percent since February, citing an improvement in the inflationary outlook and market agents expect new cuts down the road, as inflation should moderate further in the summer months. But Central Bank sources said such remarks made it difficult for the authority to take action on interest rates even if had intended to do so. "You wouldn't cut interest rates under such circumstances even if it had been the original plan, because if you do it now, it would be misinterpreted as being done for the sake of competitiveness. The level of exchange rates shouldn't be a concern for everyone," a Central Bank source said declining to be named. "The one thing the Central Bank takes into account while tampering with interest rates is the inflationary outlook and nothing else," he added, echoing the notion the bank has adopted while laying out its disinflation strategy last year and has expressed on more than one occasion. The bank is pursuing an implicit inflation targeting strategy, whereby it uses short-term interest rates as a policy tool to steer expectations, until it officially adopts the plan sometime in the second half of this year. The series of rate cuts also helped reduce Treasury's borrowing costs by half from last year. Annualized compound yield at a three-month treasury bill auction turned out 52.48 percent yesterday, on a net sale of TL 982 trillion. Nominal sale of the t-bills totaled TL 1,091 trillion versus a bid of TL 1, 713 trillion. The appreciation of the lira itself, which the International Monetary Fund attributed to a return of investor confidence, has substantially aided disinflation in the last few months and served the Central Bank's ambitions. Analysts now expect year-end inflation to beat a government projection of 35 percent, an unusual case when looking at Turkey's track record on fighting inflation. London-based HSBC yesterday recommended investors to buy the lira around current spot rates against the dollar, targeting gains to 1.24 million to the U.S. unit, Reuters reported. "With overnight rates at 51 percent, Turkey currently offers one of the most rewarding carry trades in emerging markets," said an analyst at HSBC, adding that the rate cut would benefit the t-bill market most. The Central Bank source noted that lira depreciation still would not constitute a problem by itself, but sudden movements in exchange rates were unwelcome. "We've seen that kind of volatility before but it changed later on. This trend can't be permanent; there's no reason justifying such a spike taking place overnight," he added. Ankara - Turkish Daily News
