Moody’s disappointed a lot of folks this week when it failed to raise Turkey’s credit rating to investment grade.
After Fitch upped Turkey on Nov 5 into the coveted top tier, hopes were high that Moody’s would do the same and soon. Being rated investment grade by at least two agencies has a lot of pluses . But all the subsequent investment inflows have side effects and one of them is currency appreciation. Check out these graphs. (click to enlarge)
The currency has been a headache for Turkey’s central bank for a while now. Back in 2010, lira appreciation was the motivation for embarking on an unorthodox monetary policy. This year in nominal terms the lira has gained just over 5 percent against the dollar, as Turkish stocks and bonds, among the best performers in the world in 2012, have lured foreigners.
But other currencies, such as the Polish zloty and Mexican peso, have appreciated more. Turkey’s main problem is the real effective exchange rate (REER) which the central bank is focusing on. In real terms, against the currencies of its trade partners and adjusted for inflation, the lira has risen more than 7 percent to the highest in almost two years . That’s because the country’s inflation rate until recently was almost in double digits.
Caught between inflation and the lira, the central bank must walk a fine line on monetary policy. Murat Toprak, an emerging markets strategist at HSBC, says: