To help stem the tide of its record low currency levels amid high inflation, Turkey’s central bank raised interest rates by 625 basis points to 24% in a move that runs counter to President Recep Tayyip Erdogan’s request to keep borrowing costs low.
The move by the central bank comes as a surprise as the common notion was that President Erdogan was a heavy influencer in terms of monetary policy. Just hours prior to the central bank’s announcement, President Erdogan referred to interest rates as a “tool of exploitation,” positing “I say, let’s drop these high interest rates. Interest is the cause, inflation is the result.”
However, independency prevailed for the Turkish central bank, which helped to push the local currency higher by 3% against the U.S. dollar.
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Turkey faced heavy pressure to raise rates as the lira has spiraled downward by more than 40% against the U.S. dollar. However, the latest efforts by the central bank appear to be steadying its value for the time being.
“This was the right decision,” said Timothy Ash, senior emerging markets strategist at Bluebay Asset Management. “The Turks just gave themselves a chance — to hold the lira, and rebuild the trust of the market. They can get out of this without the IMF and without resort to capital controls. The re-balancing will be brutal, but with the right policies herein, there is now a way out.”
Meanwhile, in the U.S., the economy continues to be full steam ahead as the major indexes like the S&P 500 reached record levels last month. With no signs of slowing, it appears that a steady diet of rising rates is in order, according to Boston Federal Reserve President Eric Rosengren.
“Gradually increasing over the course of this next year makes sense,” said Boston Federal Reserve President Eric Rosengren. “If things work out well for the economy, and that’s what I expect and hope, then we’ll be in a situation where we need to have somewhat restrictive policy over time.”
With a monetary policy meeting slated for later this month, Rosengren also forecasts that the current federal funds rate will float between a range of 2.5% to 3%. After the two previous rate hikes earlier this year, the current federal funds rate stands at 2, which could affect auto loan offerings sensitive to these short-term interest rate moves.
With the economy in the late stages of the bull market in the U.S., its geopolitical tensions with Turkey could continue to weigh heavily on the lira.
“The lira will remain under pressure in the coming months owing to tightening global liquidity conditions and tensions between Turkey and the U.S.,” said Agathe Demarais, Turkey analyst at the Economist Intelligence Unit.
For more trends in fixed income, visit the Rising Rates Channel.