Turkey’s central bank
The cost of
concision
View attachment 558701
ISTANBUL
How a few missing words hurt
Turkey’s turnaround
A bank’s words have power
Three of them (“whatever it takes”)
calmed the euro area’s debt panic in 2012.
Another few (the Federal Reserve mulling a
“step down in our pace of purchases”) start-
ed the taper tantrum that upset emerging
markets in 2013.
What is left unsaid can also be power-
ful. After its interest-rate meeting on April
25th, Turkey’s central bank failed to repeat
eight words that had been included in each
of its seven previous statements: “if need-
ed, further monetary tightening will be de-
livered”. The omission cast doubt on its
commitment to fight inflation, which was
almost 20% in the year to March. In re-
sponse, the lira fell by more than 1% against
the dollar. It has fallen by 11% this year.
The mishap was an uncomfortable re-
minder of last summer’s currency turmoil,
when the central bank (browbeaten by Re-
cep Tayyip Erdogan, Turkey’s president)
failed to raise interest rates swiftly enough
to prevent a collapse in the currency. But
the parallels should not obscure what has
changed in the interim. Turkey’s economy
is better balanced now than it was then.
In September the central bank reassert-
ed itself, increasing interest rates to 24%,
where they have stayed since. The combi-
nation of tighter money and a cheaper cur-
rency curbed import spending and encour-
aged exports. As a result, Turkey’s
current-account deficit has narrowed far
more swiftly than even the government
had envisaged. Although its import bill is
hardly the only claim on its foreign earn-
ings (its banks and firms must also service
heavy external debts), the lira was relative-
ly stable from December to February.
Local elections in March were supposed
to bring a similar stability to politics, con-
cluding a maddening cycle in which Turks
marched to the polls seven times in five
years. Instead, the weeks before and since
have done the opposite, unsettling both
Turkey’s politics and the markets.
Mr Erdogan’s party, which lost in most
of the country’s big cities, has so far refused
to accept its narrow defeat in the Istanbul
mayoral contest. Citing alleged irregular-
ities, it has asked for a new vote. That
would trigger yet more political turmoil,
which could bring protesters onto the
streets and send foreign capital running
for the exit. Investors distinguish clearly
between countries that do and do not have
free and peaceful elections, says Ibrahim
Turhan, a former chair of the Istanbul stock
exchange. “No one would like to see Turkey
in the second group.”
In the month before the elections, Mr
Erdogan encouraged state banks to in-
crease the amount they lent at cheap rates.
Banks also came under pressure to lower
lira deposit rates, making other currencies
more attractive by comparison. Turkish
residents now hold over half of their de-
posits in dollars and other hard currencies.
None of this has helped the lira. On
March 21st the central bank revealed it had
burned through $6.3bn (over 18%) of its net
reserves in a fortnight, presumably in an
undeclared effort to prop up the lira. After
the news spooked investors, the govern-
ment squeezed the offshore lira market,
making it harder for foreign speculators to
borrow the currency in order to sell it.
But the squeeze also posed a problem
for Turkey’s banks, points out Brad Setser
of the Council on Foreign Relations, an
American think-tank, because they depend
on lira funding in the overseas market. To
ease their discomfort, the authorities made
it easier for banks to swap their dollars for
lira from the central bank. That had the ef-
fect of temporarily bolstering the central
bank’s dollar reserves, until the currencies
are swapped back again. As the financial
markets cottoned on to what was happen-
ing, investors began to distrust the central
bank’s weekly reserves figures.
Was it trying to mislead investors? Prob-
ably not. As required by imf standards, it
duly reported the swaps in its monthly re-
serves statement, which is published with
a 30-day lag. And in a press conference on
April 30th, it explained the source of its
sudden dollar infusion.
But although it clarified why its reserves
had abruptly gone up, it did not reveal why
they had suddenly gone down in the weeks
before. Judging by the financial markets’
reaction, the conference did little to bolster
investors’ faith in the lira. The words of
central banks can be powerful. But al-
though they choose what to say, markets
decide what to hear.
