Turkey’s Central Bank has finally made a long overdue raise in interest rates by 300 basis points as it attempts to rescue its plummeting national currency, which has fallen 20% against the U.S. Dollar this year. Although the Turkish Deputy Prime Minister attempted to allay fears that the country would not step-back from a rules-based economy, we see the rate hike as a bare minimum fix that will assist in stabilising the lira in the short term.
Although the currency strengthen in the last two trading days on news that the central bank will simply its complicated interest rate system, we still see volatility in the lira remaining with the central bank probably requiring a further 200 to 250 basis points of rate hikes if the currency resumes its slide.
It is worth noting that this is not the first time Turkey has found itself in a similar situation. Back in January 2014, the central bank resisted political pressure and raised interest rates in an effort to stabilise the currency amidst domestic upheaval and retreating global emerging markets.
Looking ahead, despite the increase in rates and the simplification of its policy-rate system, we see these as short-term solutions as it is arguable whether or not the central bank has done enough to get the lira back on track as it will continue to be susceptible to selling pressure. The real test will occur after the elections. Nevertheless we don’t expect a sharp reversal in the weakening trend of the lira as challenges still remain. The key element is we see a decrease and not a reversal in the uncertainty surrounding fiscal policies and politics but see a slow return to economic orthodoxy.