Four days after Turkey’s official borrowing costs fell below zero when adjusted for inflation, Treasury and Finance Minister Berat Albayrak said it’s the nominal interest rate that “matters more” and suggested the country’s currency should be at a more favourable level.
Turkey needs a “more competitive” lira, Bloomberg HT cited Albayrak as saying at a news conference in Istanbul on Monday. “The negative real rate is not new in Turkey. What matters more is the nominal rate.”
The central bank’s fifth straight round of easing under governor Murat Uysal pushed its real rate below zero, only months after Turkey boasted one of the highest inflation-adjusted yields in the world. At the same time, the lira has held up well, notching the emerging world’s fourth-best performance against the dollar so far this year.
Albayrak criticised private banks’ profit-oriented approach, saying they should support the real sector like state banks and keep up with changing environment.
He said Turkey will no longer go back to its old habit of powering the economic growth with bank loans. Turkey will increase the number of lira-based financial products, he said.
With the economy only starting to heal after the lira’s crash in 2018 tipped it into a brief recession, a weaker currency would make exports more competitive. Turkish inflation capped last year at 11.8% as the lira depreciated 11.1% against the dollar, meaning exporters didn’t get much of a boost from the currency’s slide in real terms.
But lack of a buffer against market selloffs presents threats for Turkey. Negative real interest rates also expose Turkish banks to occasional “risk-off” episodes, in which the premium no longer compensates investors for the multiple risks of investing in Turkey and its banks, according to Moody’s Investors Service.
“The negative rate makes lending to banks and investing in Turkish lira less attractive than in other emerging markets with positive real interest rates and will likely negatively affect central bank credibility,” Moody’s said in its Credit Outlook report on Monday.
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