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Turkey’s Central Bank Raises Key Interest Rate Aggressively to Battle Economic Slowdow
Turkey’s Central Bank Raises Key Interest Rate by 7.5 Percentage Points
On Thursday 24th August, Turkey’s central bank has raised its benchmark interest rate by an aggressive 7.5 percentage points. This is the fifth such increase since the start of the year, in response to an ongoing inflationary pressure as a result of rising consumer prices, unemployment and a weakening Turkish lira.
The central bank stated that the hike was necessary to restore price stability and anchor inflation expectations. As such, the move has been welcomed by many business organizations and analysts who had been calling for tougher action from the central bank to counter the country’s rising inflation problem.
Turkey’s inflation rate is currently the highest in the G-20, having risen rapidly from 9.2% in April to 12.2% in July this year, which is significantly higher than the central bank’s annual inflation target of 5%. The bank’s recent moves to tighten monetary policy have been aimed at tackling this issue, thus allowing for more consistent macroeconomic stability.
The decision to raise the key interest rate was also driven by the continued devaluation of the Turkish lira, which has been caused by a combination of geopolitical factors, economic uncertainty, and the government’s attempts to increase public expenditure. At the time of the hike, the lira was trading at around 8.39 against the US dollar, down 7.4% since the start of the year.
The lira’s depreciation has also stoked concerns among investors about the impacts of further inflationary pressures. This is because it has made Turkish products more expensive for foreign buyers, reducing the competitiveness of domestic firms and therefore weighing on economic growth.
Moving forward, it is likely that the central bank will continue to raise interest rates in order to maintain price stability and encourage economic recovery. In addition to this, policymakers will need to develop a strategy to address the current account deficit and boost investor confidence, otherwise the outlook for Turkey’s economy remains uncertain.Turkey Shocks Markets with Aggressive Interest Rate Hike
On Thursday, 24th August 2023, the Central Bank of Turkey (CBT) stunned global financial markets by unexpectedly raising its key interest rate by a massive 7.5 percentage points. This was a new record high for the bank and the largest single rate hike by any central bank since the financial crisis of 2008.
The announcement came at a time when inflation in the country had been steadily climbing, reaching 16.7% in July, and the Turkish lira was fast depreciating against the US dollar and other major currencies. The CBT said the move was taken to “support price stability, contain risks to the inflation outlook, and restore the normal functioning of the monetary policy framework.”
Market analysts had expected the CBT to take some form of action to help curb the country’s inflation and support the lira, but the size of the rate hike came as a surprise to many. The decision sent shockwaves through global financial markets and sparked a sell-off of the Turkish lira, which dropped by more than 2.5% against the US dollar.
The rate increase represents a major shift in the CBT’s monetary policy stance and could have far-reaching implications for domestic and international investors. Some analysts have voiced concerns that the hike could stifle economic growth and hamper the government’s efforts to improve the country’s fiscal situation.
At the same time, the move could help to reduce inflation and protect the Turkish banking sector from external shocks. It may also encourage foreign investors to return to the country in search of higher returns, which could ultimately help to increase overall investor confidence.
Only time will tell if the CBT’s decision to raise rates by 7.5 percentage points is the right move, but it is clear that the move has sent shockwaves through global financial markets and will be watched closely by investors in the coming days.