Dollar heats up ahead of Central Bank's interest rate decision

Türkiye is seven business days from local elections, and markets are locked in anticipation as the Central Bank of the Republic of Türkiye (CBRT) is expected to make the final interest rate decision before the elections today.

The prevailing expectation is for the interest rate to remain steady at 45%.

However, there are indications that the CBRT might surprise the market with an increase.

Ahead of the CBRT decision, the dollar price on March 21 starts at 32.41 TL. In the Grand Bazaar, the dollar is 33.25 TL, while the Euro price is 35.55 TL. These prices are also nearing record levels.

Currency demand comes from locals

Tufan Deriner, Managing Partner at Istanbul Portfolio, emphasized that the increasing demand for foreign currency, particularly, originates from locals because of the upcoming elections.

"The margin between the interbank market and the free market for the dollar is around 3%, which is not good.

There isn't much foreign currency leaving the system; the money stays within.

A 45% policy interest rate isn't insufficient, but there is high pressure on the exchange rate. In such times, it is necessary to control certain aspects, and we might be approaching such a period now," he stated.

CBRT March meeting interest rate decision

Given the tight monetary policy, Deriner highlighted deposit interest rates have risen from around 43% to 50%.

"So, interest rates have increased. However, because of the demand for foreign currency before the elections, the CBRT may raise interest rates at this meeting, and this wouldn't be much of a surprise. Such a case would signal that necessary measures can be taken before the elections. The market may pass through the period until the elections more comfortably, and the margin between the two exchange rates may narrow," he said.

Will the dollar rise after the elections?

Quoting Professor Selva Demiralp, Deriner said that the CBRT had indicated monthly Consumer Price Index(CPI) developments and left the door open for interest rate adjustments if necessary.

"Monthly CPI indicators are exceeding expectations. Therefore, a decision on interest rates in this meeting would carry high symbolic significance before the elections. An interest rate hike wouldn't have a very slowing effect on the economy. However, a significant surge in exchange rates will not be allowed. I do not expect a significant increase in the dollar after the elections," Demiralp said.

Demiralp also pointed out that efforts are being made to control inflation through exchange rates.

"The CBRT has taken significant measures recently, and if they 'pass' on interest rates in this meeting, they may indicate that they want to see the effects of the measures taken. In the meantime, excess liquidity has been withdrawn and its reflections are seen in deposit interest rates.

However, what matters is the real interest rate return, and if the deposit interest rate is sufficient, the allure of the Turkish lira increases further," she said. 

Source: Newsroom