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Turkey chews a ‘shock’ of thousand basis points rates to revive the lira

Date: June 25, 2024 Time: 14:15:36

Turkey seeks to recover the credit lost among international investors during the last five-year presidential term of Recep Tayyip Erdogan with a revolution in its monetary policy with few precedents and uncertain results. The market expects a vertical rise in rates this week only comparable to the one Russia carried out in 2022. the value of its currency, which has exceeded an 80% drop since 2018 against the euro or the dollar.

Experts Expect That Next Thursday, The Central Bank Of Turkey Will Undertake An Interest Mega-Rise Of At Least 1,000 Basis Points, 10 PURECENTUU ALS POINTS, Which Can Bring The Official Reference Rates From The Current 8.5% To 18.5%. There are investment banks that see even more than the increase under the command of the new governor of the institution, until they reach 25%. Hafize Gaye Erkan makes her debut at the head of the monetary authority after a long career in the US as a banker at Goldman Sachs and, above all, as a manager at the ill-fated First Republic Bank before the entity’s problems began.

Over the past two and a half years, Turkey has experienced a history of wildly fluctuating interest rates, cutting rates rapidly and then raising them even faster whenever there is a crisis in the currency market. Erdogan, known as a critic of high borrowing costs, intervened at the central bank to push through a series of rate cuts that took it from 19% to 8.5% ahead of last month’s election.

The foreseeable effect was an acceleration of Turkish inflation, as was unanimously warned in the international financial community and also critical voices within the government itself and the central bank. Erdogan’s response was to take control of monetary policy with several dismissals at the top of the monetary authority. In fact, Erkan is the fifth visible face of the organization in five years. In 2022, the economy entered a state of hyperinflation that brought CPI growth to year-on-year rates of up to 85%, although it now stands at 39%.

The change of government and the appointment of Mehmet Simsek as the main economic incumbent have put Turkey back towards conventional politics. Investors began to discount that the country would stop intervention in the lira after having practically depleted its foreign currency reserves. The 180 degree turn has been forced by the threat of a balance of payments crisis, according to analysts, but they open the door for a midpoint stage.

The first signal will come from the central bank. A 1,000 basis point rise in benchmark rates will support the value of the currency at the cost of sacrificing growth and most likely triggering a recession. Turkish GDP grew in the first quarter by barely 4% but with inflation between 15 and 20 times higher, assuming a serious crisis in companies and households.

Major investment banks such as JP Morgan, Deutsche Bank, Goldman Sachs and Morgan Stanley see closing the gap between rates and inflation as a way to curb Turkish financial instability. “It is difficult to assess the precise reaction at this point, but we would argue that the recent rapid depreciation of the currency requires a first increase [de tipos] credible”, say Deutsche Bank analysts in a report cited by ‘Reuters’. In fact, they expect official rates to rise from 8.5% to 25% between June and July.

The unanimity among investment bankers advocating a mega-rise in rates is part of the need to recover the credibility lost in the last stage of Erdogan’s government. “We believe that the new economic team will stop restoring its marginal lending rate as the anchor for interest rates in the economy, and therefore the difference at the beginning to bring it closer to deposit rates,” they point out at Goldman Sachs. Interest rates on Turkish lira-denominated deposits without exchange rate protection skyrocketed to 40%, breaking any connection to the central bank’s 8.5% rate.

Morgan Stanley expects interest rates to be between 20% and 25% between June and July, in the same way as JPMorgan, which limits the movement to this Thursday. If it occurs, the rate increase would far exceed 1,000 basis points and could reach up to 1,700 bps, that is, between 10 and 17 percentage points. Banks also expect the Turkish lira to react to the rate shock.

The great precedent for these types of drastic policies to avoid financial instability, a corralito and currency depreciation came just 15 months ago, when Russia executed an emergency rate hike from 9.5% to 20% to defend the ruble four days after the start of the invasion of Ukraine.

The Russian currency came to lose more than half of its value in a few days and the monetary defense in the form of extremely high rates took effect. The ruble rallied strongly in the following weeks to appreciate against the dollar and the euro until Russia started cutting rates again. As now in Turkey, a woman (Elvira Nabiullina) applied that decision, multiplying the financing costs of the Russian economy until it was suffocated in recession.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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