BURSA
Turkish lira volatility in the past two months has been driven by U.S. tightening of monetary policy, Turkish Deputy Prime Minister Ali Babacan said on Friday.
U.S. Federal Reserve governor Janet Yellen told Congress on Feb. 24 that interest rates would go up in the U.S. in the near future. This would strengthen the value of the dollar against other currencies.
In Turkey, the Central Bank of the Republic of Turkey cut interest rates on Feb. 24.
Speaking at the Bursa Economic Summit, Babacan said that Turkey's reduction of interest rates is a policy divergence with the Federal Reserve.
The euro, which is subject to very low interest rates, is also falling against the dollar.
“Maybe disputes within Turkey heighten the scale of volatility a bit more. But I assure you that from Brazil to India, from Indonesia to South Africa, to Mexico, every country has seen its currency weaken against the dollar. This volatility, which has lasted three to four weeks, was not Turkey specific.” Babacan said.
As of March 10, Mexico’s currency hit a record low against the dollar, down 0.6 percent to 15.56 pesos per dollar. Brazil’s real fell as much as 1.5 percent to 3.12 per dollar.
The South African rand fell to a 13-year low against the dollar, down 1.3 percent to 12.25.
The exchange rate for the euro to the dollar could fall or rise about 5 percent in a week. This is very high and very sharp volatility. And it is very hard phenomenon to administer,” Babacan noted.
He added that the euro’s sharp decline and relatively slow growth in the Eurozone has had additional impact on Turkey, as Europe is the country's most important trade partner as well as its biggest export market.
In 2014, Turkey sent over 40 percent of its exports to the European Union, receiving payment in euros, while over 60 percent of its imports were paid for in dollars. This has a significant impact on the profit earned by Turkish exporters.
Babacan said that the most important challenge for Europe is the failure by the European Union to make structural reforms.
“We project 4 percent GDP growth for this year. But if the weak outlook for Europe does not change, our target may be at risk. If European markets improve, it would be positive for our growth” Babacan said.
The government considers that near five percent growth is a must to address unemployment rates close to 10 percent in Turkey.
The recent rise in the value of the dollar against the Turkish lira poses a challenge, as it boosts inflation through the foreign currency pass through - this means that dollar-priced products are more expensive, and raw materials purchased in dollars for use in Turkish products are more costly as well.
The central bank intends maintains high rates until there are clear signs of improvement in the inflation outlook.
“How long rates will hover at current levels is important. If they stay near current levels, the central Bank has to revise its inflation targets,“Babacan said.
He also noted that the current account deficit is expected to drop to 4 percent this year as long as oil prices stay at current low levels.
