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Tuesday, July 23, 2024

Turkey shocks markets with 25% interest rate hike to fight inflation

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Turkey’s central bank raised its key interest rate by a massive 7.5 percentage points to 25% on Thursday, in a bold move to curb soaring inflation and stabilize the Turkish lira.  The rate hike, which was much higher than expected by analysts, signaled a new determination by the bank to tackle inflation, which reached nearly 48% in July, the highest level since 2002.  The bank said in a statement that it decided to continue the monetary tightening process “in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior.”  The bank also revised its year-end inflation forecast from 58% to the upper bound of the forecast range, citing strong domestic demand, wage pressures, exchange rate movements, and tax regulations as factors that keep inflation elevated.  The Turkish lira, which has lost more than half of its value against the US dollar since the beginning of 2022, jumped to its strongest level since mid-July following the announcement. The lira was trading at 8.27 per dollar as of 9:00 am ET, up 4.6% from Wednesday’s close.  Erdogan, who once called interest rates “the mother and father of all evil,” has blamed high interest rates for causing inflation and has repeatedly called for lower borrowing costs to boost growth. He has also fired three central bank governors since 2019 for not following his instructions.  The rate hike was welcomed by investors and analysts, who said it was a necessary step to restore confidence in the Turkish economy and prevent a deeper crisis.  However experts warned that the rate hike alone was not enough to solve Turkey’s economic problems, which include high public debt, low foreign exchange reserves, weak institutions, and geopolitical tensions.

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