How will the Central Bank intervene?
With the lira reaching depreciating consistently of late, but especially in the last couple of weeks, there has been talk of whether the Central Bank will intervene.
In fact, the Bank did decrease its daily FX auctions from USD 40mn to USD 30mn last week, as your friendly neighborhood economist had predicted a couple of days earlier. In the same column, I had dismissed an interest rate hike to defend the lira- unless it depreciated suddenly (i.e. jumped up). But note that there are other ways to intervene in FX markets, as this comic strip illustrates:
It is in Turkish, but I guess you have an idea what it is about: The guy on the far left is an FX trader: He is giving orders to buy dollars when the guy to the right shouts: “Run! The Central Bank’s guys are intervening in the market!”. The guy with the stick is one of the “Central Bank’s guys”. He is saying, “You [beep] [beep]! So you’ll increase the dollar, huh!”
This is a Turkish financial sector classic. I received it first back in the fall of 2008 from an FX trader, when the Central Bank was expected to intervene in markets, but I think it was drawn much before then. In retrospect, the lira is much under control today than in those days:
But you don’t know it’ll happen until it happens, right:) Also, there was then considerable economic slack in the economy, so the effects of the depreciation on inflation were limited.
BTW, Happy 4th of July weekend to my Yank readers!
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