Turkey Wants the Impossible: Lower Rates and a Stable Lira

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The goal of Turkey’s central bank matters. It’s often said that intervention is bound to fail and that bureaucrats can’t fight markets, more so the global foreign exchange market, where $6.6 trillion changes hands each day. But judging victory or loss depends on what you are setting out to achieve. If you just want to inject a bit of two-way risk and let traders know you’re there, then those objectives are achievable. But they’re just short-term. The efforts by many Asian central banks during the late 1990s financial crisis are a case in point. In the end, the result was often a friendly visit from the International Monetary Fund. If the idea is to single-handedly turn an extended rout into a prize-winning rally, forget it.Some interventions have been successful. The key is usually size, underlying policy credibility and enlisting partners with enough firepower to get speculators to back off. Two instances come to mind: when the U.S. joined Japan in seeking to stem a rout in the yen in 1998 and the Group of Seven’s joint intervention in support of the euro. This isn’t where Turkey is now.

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