… as I had predicted in Monday’s, Hurriyet Daily News column, which also appeared at the blog. I am expecting someone to say, “you are very good“
Joking aside, I am not that good:)- it was pretty clear that the CBT would prefer decreasing FX auctions, or eliminating them altogether, before countering the lira weakness with a rate hike, as some were claiming. Besides, the demand for the auctions was very low for the past couple of days, with the bid-to-cover ratio at a freefall…
…and the lira continuing to depreciate against the USD EUR basket. Speaking of lira depreciation, such a persistently high FX is likely to have an impact on inflation in the coming months.
Another by-product of the decrease in auctions will be the decrease in FX reserves. If this had been early in the year, I would have been worried, as Turkey seemed not to have adequate reserves, at least according to an IMF paper I discussed at a Koc University ERF seminar a couple of months ago. I even hypothesized, in an addendum to my weekly Hurriyet Daily News column on the fate of the unpublished Turkey Staff Report, that IMF’ position on reserves could have played a role on the government’s attitude towards the Report. But there has been quite a build-up in reserves since then:
The Bank now has a strong hand in that regard, so reserves position should not figure out in the decision to scrap the auctions altogether…