Turkish interest rates rise again

My last three finance articles have focused on Turkish lira interest rates.

I have done this because interest rates are on the way up again and because many people in the TRNC are interested either as investors or borrowers.

In my last article I concluded with the paragraph below:

The pressures generated are far from played out. I predict that there will be more interest rate increases this year and I would not be surprised to see rates above 10% by the end of the year.”

I made the statement above just a week ago, in my article of August 15th.  Well on Tuesday, Turkey’s central bank increased the interest rate by .5% to 7.75%.

It did this even though it had raised rates by .75% in July.

However, neither of these rate increases nor the fact that the central bank has used up 10% of its foreign exchange reserves to support the lira, impressed the market.

The lira has slipped about 10% against the US$ this year. On the announcement, it strengthened momentarily but then soon returned back to its previous level.

Although most economists disagreed with my forecast of a series of interest rate increases going up to 10% by this year end, many were surprised by the Tuesday announcement and now are also predicting further interest rate increases.

The market will continue to test the Turkish lira.

Turkey has a huge current account deficit. That means that it needs more money than it brings in through selling goods and services. This deficit stood a US$ 54 billion in June, a 10 month high.

The shortfall is funded by so-called ‘hot money’, or short-term stock and bond investments by international funds. These will quickly exit the country if risk appetite deteriorates.

Foreign cash flows into Turkey amounted to around 5 % of its gross domestic product in the past year, data shows, among the highest in the world along with Mexico and double the emerging markets average.

However there has been a switch from $9bn in inflows into Turkish stocks and bonds for the first five months of the year, to $3bn in outflows from the start of June to August 9.

So, I am sticking to my prediction of 10% interest rates on the Turkish lira by this year end.


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