Аннотация: An increase in the discount rate of the Central Bank and an unknown amount of emission. An economic note.
An increase in the discount rate of the Central Bank and an unknown amount of emission. An economic note.
Relatively recently, I was reflecting about the depreciation of the Turkish currency - I tried to determine the logic of this process.
My assumptions were as follows.
The Turkish authorities, having no significant volumes of natural resources (oil, gas, metals), seek to increase the economic (export) activity of Turkish business. To achieve this goal, they lower the discount rate of the Central Bank - thereby creating conditions for cheaper loans.
It is assumed that cheap credit will push economic activity forward.
In addition to this, according to my assumption, a lira issue (emission) is carried out. The emission (issued funds) is directed to the implementation of the most important economic (infrastructural) projects.
Thus, the Central Bank's discount rate goes down. With a decrease in the discount rate, the interest on deposits in lira decreases.
The profitability of bank deposits in lira going down. Depositors exit the lira and buy more attractive currencies. The lira is falling.
Another effect is added. The lira - naturally - "falls" due to (possible) emission (a lira issue).
Where does all this lead?
Let's think positively and optimistically.
Suppose that thanks to cheap loans, the economic activity of Turkish business has increased markedly and significantly.
Let's also assume that the most important economic (infrastructure) projects are successfully (will be) completed and a cash flow will start to be generated.
After such hypothetical (real) results of economic policy, the lira exchange rate will stabilize. Firstly, the reduction of the discount rate reaches the finish of the own negative effect (rentiers "left" the lira, active businessmen "had entered" the lira). Secondly, emission is being completed (is being decreases) (projects are completed, a financial means has begun to arrive out of completed projects).
The Turkish authorities, may be, aiming to completely eliminate the dependence between bank rates and economic growth. But these are only hints - it is not realistic. It is difficult to achieve such an aim - a kind of political and economic art of the highest level is needed.
These were our hypothetical arguments based on acquaintance with some materials posted on the Internet.
However, one could speculate what would happen if the Turkish authorities changed their priorities. Suppose they put economic growth (which is provided through cheap loans) in second place, and the stability of the lira in first place.
After changing priorities, they are taking measures to stabilize the lira.
How can they do it?
For example, they may sharply raise the Central Bank's discount rate.
According to the generally accepted logic, an increase in the discount rate is followed by an increase in interest rates on bank deposits.
If so, then a huge number of potential and real owners of bank deposits begin to buy lira and place deposits in banks in lira. Such bank deposits bring attractive income!
Now the question is: will the increase in the discount rate lead to stabilization (growth) of the lira exchange rate?
If the reader followed the logic of my reasoning, he will ask: what will be the situation with emission (a lira issue)? After all, this is the second, independent, factor influencing the exchange rate of the lira.
However, those fragmentary portions of information that come to my disposal indicate that the Turkish authorities hope for the success of their economic policy - despite the depreciation of the lira ... For many reasons, I consider such success to be quite achievable and real ...
[MMDCCXXXV. Turkey, 2022: how to get out of the "crisis"? A note. - January 31, 2022.].
February 28, 2022 17:46
Translation from Russian into English: February 28, 2022 18:25
Владимир Владимирович Залесский "Повышение учетной ставки и неизвестная величина эмиссии. Экономическая заметка".
{ 2831. Повышение учетной ставки и неизвестная величина эмиссии. Экономическая заметка.
MMDCCCI. An increase in the discount rate of the Central Bank and an unknown amount of emission. An economic note. }