Turkey’s Central Bank Raises Interest Rates to 30% in Effort to Contain Inflation, but Investors Remain Skeptical

Turkey’s Central Bank Raises Interest Rates to 30% in Effort to Contain Inflation, but Investors Remain Skeptical

Investing.com – Turkey’s central bank raised interest rates to 30%, but the rise failed to allay investors’ concerns that monetary policymakers are not doing enough to contain inflation.

The central bank raised the key interest rate to 30%, from 25%. However, the declines have not stopped yet.

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In addition, investors sold Turkey’s US dollar-denominated government bonds, sending yields higher.

The interest rate increase was roughly on par with expectations, but some investors were hoping for a more robust increase amid signs Turkish inflation is back on the rise.

However, the lira’s weakness makes imports more expensive and challenges the new economic team of President Recep Tayyip Erdogan, who has been charting a cautious return to more conventional monetary policy since his re-election in May.

Bigger moves to rein in high inflation

Turkey’s central bank delivered another big hike in interest rates, matching expectations but disappointing a market that was pricing in tougher moves to curb inflation at nearly 60%.

At the same time, Wall Street banks revised their expectations for Turkish interest rates at the end of the year, as JPMorgan Chase & Co. expects to approve an increase of another 500 basis points in October, while Morgan Stanley increases its interest rate expectations at the end of the year. The year to 35% compared to 30% previously.

The lira reversed its gains after the Monetary Policy Committee raised interest rates for the fourth time in a row.

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The stakes are high as President Recep Tayyip Erdogan’s new technocratic team tries to attract investors who have shunned Turkey after years of erratic and unorthodox policies that toppled the economy.

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The central bank was initially criticized for timid interest rate increases after appointing new governor Erkan in June, and has picked up its pace starting with a decision last month to increase by 750 basis points that exceeded most expectations.

In an accompanying move on Thursday, the central bank said it was “determined to establish a path to lower inflation in 2024.”

The latest decision follows Erdogan’s apparent endorsement of monetary tightening this month, despite his long-held beliefs that ultra-low interest rates can curb inflation.

Inflation expectations have recently grown more alarming, with monthly price growth jumping by more than 9 percentage points in July and August. While a report conducted by the Central Bank revealed that analysts expect inflation of approximately 70% at the end of this year, higher than the government’s estimate of 65%.

Lira and grams of gold today

The Turkish lira is now declining by 0.2% to 27.1691 liras per dollar.

The lira is still down about 31% this year, and is one of the worst-performing currencies among its emerging market peers.

While the Turkish lira denominated rose by 0.32% to 1682 liras.

2023-09-22 07:43:00
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