The Turkish Central Bank raised its policy rate for the fourth consecutive time in this week's meeting, to 30% in a 500 basis point increase from the 25% before the meeting. Markets did not react drastically as the consensus expectation was 500 basis points.
The Turkish Central Bank has a rough patch ahead, as it will try to balance foreign investor confidence, inflation, and economic growth. I think the bank is likely to end the year with an interest rate of around 35-40 percent. Inflation seems to have defied expectations in Turkey, just as it did in most countries around the world, and the Central Bank expects it to be around 62% yearly, at the higher end of the predicted range. This could mean more rate hikes are to come.
The foreign investors' confidence in Turkey has risen after the return to orthodox economic policies, and Turkey is a country that always depends on foreign credit or capital, so positive real interest rates that have a premium over the developed countries' rates are the only way to prevent capital flight.
But the other side of the coin is that too many rate hikes too fast can plunge the country into a recession, as growth, even though it is stronger than most countries, has started to stall. Also, if the rates are high and the lira is valuable, this might hurt exports, which is one of the focal points of the Turkish economic model at this moment.
Inflation, growth data, and the political picture will all be determinants of Turkish monetary policy moving forward.
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