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Jumping out of the frying pan and into the fire.

ySTANBUL (CyHAN)- The central bank's decision to leave the key interest rates unchanged in its latest Monetary Committee Meeting (PPK) on Wednesday was perceived by the markets negatively, and the reaction was to carry the currency rate to near-record levels in interbank trading.

Thursday was an official holiday due to the anniversary of the foundation of Parliament, yet the lira kept sinking in international markets and broke the all-time record low by reaching 2.7330 against the dollar.

Reading the central bank's move only as an option to leave the interest rates intact would be deceptive. This decision is a consequence of an option between two conflicting alternatives: Either the PPK chose not to raise the rates, or it deferred a lowering of the rates. This point is stained with a shade of ambiguity, and this obstinate obscurity is still disturbing market players, who are deeply concerned about the extent of the political pressure over the instrument preferences of the PPK to deal with the monetary policy challenges.

The central bank is grooming the markets with the idea that the currency rates may seem to be high, but in real terms, there is still enough room to let the lira depreciate more before calling in a dramatic intervention. The gap between the nominal and real values of the lira widened from September 2014 to the end of the year.

The nominal depreciation since the beginning of the year is about 15 percent, whereas the real value of the lira declined by only around 5 percent in the meantime. But these two have just started converging again, and the curve of the lira's real value seems to be moving quickly to intersect the nominal currency rate curve from atop a two-axis diagram.

There may not be enough time for the bank to act before its biggest justification for procrastination becomes obsolete.

The central bank is making the same mistake that led to its destructive decision in January 2014 to hike the one-week repo rates by 5.5 percent, from 4.5 percent to 10 percent. It had avoided raising the benchmark rates incrementally amid high pressure from some members of the government, and when there was no other option, it had to make an excessively high adjustment to the interest rates in order to catch up with the realities of the day.

Today, I fear the process that forced the banks to make an excessive adjustment last year will be repeated, promising much harder consequences. The bank is jumping out of the frying pan and into the fire.

It is now well understood that the bank has ruled out raising the interest rates until the election, or, until the real value of the lira falls to 96 points, and that the recent sharp fall in the currency substantiates this.

What can the bank do instead, to at least mitigate the extreme volatility in the lira's value? Please keep in mind that ambiguities in international markets are far from being resolved, and the upward pressure on the inflation rate by food prices and the currency-oriented costs may not subside anytime soon. In the meantime, the economy's alarm bells are ringing, and uncertainties concerning the outcomes of the elections are chafing at investors.

One option may be to shelve the one-week repo funding temporarily and resort to overnight auctions within the interest rate corridor. This will help the interest rates to be close to the marginal funding rate, or the upper limit of the corridor, which is set at 10.75 percent. This will increase the funding costs and support the value of the lira. Another option is to elevate the required reserve rates to stem the liquidity of the lira while lowering that of the dollar depot. The bank has already done this several times, to no avail. The banks seem to be using the extra dollars they get from this channel to cover their short positions.

These are, regrettably, no more than palliative solutions. Even hiking the interest rates is not the real answer. It is the inflation that must be beaten once and for all, and stability must be guaranteed. A robust rule of law must be universally respected, and democracy must prevail within all institutions.

Just consider a very recent example. The government has carried out extensive technical studies for 4G services, and has prepared all the settings necessary to invite telecom operators to a tender for the distribution of the licenses. The state's relevant bodies, which conduct research and development, have spent time, energy and lots of money to create an advanced system to make the domestic provision of technical equipment and software. The telecom operators have made investments to upgrade their infrastructure for the 4G services, spending hundreds of millions of dollars, and have run TV commercials to promote their preparedness for 4G technology.

The ruling party promised voters in its election statement that the transition to 4G will be completed soon. Then the president showed up at a fair on Wednesday and said, depending on "a short presentation," that the country would turn into a technological wasteland by bringing in 4G when the developed world is about to get 5G. Now the fate of the 4G license tender is uncertain and the operators are paralyzed, stuttering ruefully without knowing how to react to this surprise.

We must first save ourselves from these kicks in the teeth. (ybrahim TE-rkmen/Today's Zaman)


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Publication:Cihan News Agency (CNA)
Date:Apr 24, 2015
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