SUMMARY
- Turkish central bank elevates interest rate to 30% from 25%.
- Lira sees 30% decline against the dollar this year.
- Financial experts praise the decision, expect more aggressive moves ahead.
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In a recent move to counter its spiraling inflation, Turkey's central bank made headlines by upping its primary interest rate to a whopping 30%. That's a significant leap of 5% from the previous 25%.
This strategic decision sent a slight tremor through the financial world, causing the Turkish lira to take a tiny tumble, depreciating to 27.06 against the dollar. A bit of a financial flashback: the lira's seen better days. It's dropped 30% against the dollar this year alone and has seen a staggering 78% decline over the past half-decade.
This isn't Turkey's first rodeo with rate hikes. Back in June, the nation cranked up its interest rate for the first time in over two years. This was a move instigated after President Recep Tayyip Erdogan brought in a new squad of policymakers. They promised a more conventional economic approach to help steer the country out of its inflation whirlwind. Traditional economic wisdom suggests that to rein in inflation, you've got to jack up those rates. However, Erdogan, famously not a fan of interest rates, had been advocating for a rate reduction strategy.
After lowering the rate from 19% at the tail end of 2021 to a mere 8.5% by March, inflation surged, peaking at a staggering 80% in late 2022. It then cooled down to just below 40% in June. With renewed vigor, the central bank laid out a plan in July, aiming to tame inflation down to 5% in the foreseeable future. But hold onto your calculators, the forecast has changed. Turkey now predicts an annual inflation rate of 65% by the close of 2023, a jump from the previously anticipated 24.9%.
Financial experts have largely given the thumbs-up to Turkey's latest decision. Liam Peach, a senior economist from Capital Economics in London, highlighted that this aggressive rate hike is a clear sign of Turkey's commitment to grappling with the inflation beast. He believes this bold strategy is igniting hope among investors. Meanwhile, Timothy Ash from BlueBay Asset Management hinted at the significant challenges ahead but appreciated the central bank's approach.
Both experts emphasized the importance of this monetary shift. Following past timid increases, the central bank pulled a surprise move in August with a massive 750 basis point hike. The latest decision seems to be in line with this new assertive direction. However, according to Peach, there's still a lot of monetary muscle to flex, expecting rates might climb to 35% by year's end.
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