Turkey’s central bank made headlines on Thursday with an unexpected interest rate hike to 25%, a significant jump from the previous rate of 17.5%. This move surprised economists who had anticipated a more modest increase to around 20%. The rate hike is a clear indication that Turkey is committed to curbing inflation through proactive monetary policy measures.
Inside the Rate Hike and Market Reaction
In response to the central bank’s announcement, the Turkish lira witnessed a surge against the U.S. dollar and the euro. The dollar had then declined by approximately 5.3% against the lira, while the euro had dropped by 5.9% against the same currency. This market reaction reflects investors’ optimism about the central bank’s efforts to stabilize the economy and rein in inflation.
Commitment to Disinflation
The Turkish central bank committee stated that its decision to continue the process of monetary tightening is aimed at achieving several key objectives. These include establishing a clear path towards disinflation and preventing further deterioration in pricing behavior. The bank’s decision comes in light of persistently high inflation rates.
Inflation Challenges and Revised Forecasts
The Turkish central bank’s decision to raise interest rates is motivated by ongoing challenges related to inflation. Despite a decline from its peak of 85% in October 2022, inflation has remained a concern. From June to July of this year, inflation surged from 38% to nearly 48%, driven by factors such as strong domestic demand, wage pressures, exchange rate fluctuations, persistent services inflation, and tax regulations. Given these challenges, the central bank revised its year-end inflation forecast from an initial estimate of 22.3% to a higher projection of 58%.
Change in Leadership and Policy Direction
The appointment of Hafize Gaye Erkan, a former Wall Street banker, as the new central bank governor in June signaled a change in Turkey’s monetary policy direction. This change came as a departure from the controversial strategy of lowering interest rates in the face of soaring inflation. Since Erkan’s appointment, the central bank has taken steps to raise interest rates in both June and July, although the July rate hike fell short of market expectations.
Reassuring Investors and Economic Outlook
Liam Peach, a senior economist specializing in emerging markets at Capital Economics, highlighted the significance of the recent rate hike in reassuring investors about Turkey’s economic trajectory, as quoted on CNBC. Peach noted that this move indicates a return to policy orthodoxy and could instill greater confidence in the markets. He also introduced an element of uncertainty in the interest rate outlook, suggesting that rates could potentially surpass 30% in the months ahead.
ETF in Focus
For investors seeking momentum, iShares MSCI Turkey ETF TUR is probably on radar. The fund gained more than 3.5% on Aug 24. The underlying MSCI Turkey IMI 25/50 Index is a free float-adjusted market capitalization index designed to measure broad-based equity market performance in Turkey. The Index consists of stocks traded primarily on the Istanbul Stock Exchange. The fund charges 58 bps in fees and yields 3.55% annually. The fund has a Zacks Rank #3 (Hold).
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
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iShares MSCI Turkey ETF (TUR): ETF Research Reports
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