In a surprise move, the central bank of Turkey has ignored the wishes of President Recep Tayyip Erdo?an and opted to raise the country’s central interest rate from 17.5% to 24%, immediately boosting the Turkish lira.
With the aim of regaining some control over Turkey’s spiraling inflation and weakening currency on the international market, the central bank chose to follow pressures from overseas investors to stop the heavy selling-off of the lira.
This move went against the intentions of Erdo?an, who has said in the past that interest rates are just an “instrument for exploitation” and should not be a measure of tapering inflation. When the crisis broke in the last couple of months, he encouraged his citizens to sell off their foreign currencies to stimulate the lira, but the central bank apparently felt that more direct action was necessary.
The interest rate increase will hopefully allow Turkey to avoid any need for a bailout from the International Monetary Fund (IMF). A number of countries, including Argentina, have already had to ask for help to prop up their economies this year,
These struggling countries are typically solely emerging markets that are trying to cope in the face of a strong dollar and bearish investors who want to shore up their funds as worldwide volatility increases.
South Africa, Indonesia and Mexico have all been discussing options with the IMF to find methods to keep their economies flowing. Argentina has found itself struggling so much that it has asked the IMF to speed up the payment of any bailout funds so that it can rectify its economy.
Most of these countries are indebted to borrowed funds from foreign currencies, which have enabled faster growth. However, this has also meant that they have serious holes to fill when investors seek shelter from market disruptions.
Ongoing trade wars between the US and China appear to have started much of the trend. Protectionist measures on both sides lead to a range of tariff knock-on effects destabilizing various countries that relied on trade routes that did not come with the extra fees now in place.
Yesterday, the Turkish lira bounced 3% against the US dollar upon the central bank’s news, reaching $6.16. However, the central bank also announced that Turkey’s inflation had reached a 15-year high of 18%. This mandated an interest rate rise of some form, as investors otherwise had no reason to put their money into the economy. The rate of inflation would have been higher than the return that investors would get on interest.
The small rise of the lira this week has done little overall to overturn its struggles against the dollar, and it is already down 39% this year.
Investors have been concerned about Turkey, formerly seen as financially stable, following its elections earlier this year. The re-election of Erdo?an came with increased controls on power as he named his son-in-law the country’s finance leader. Rumors of nepotism spooked investors, and tensions between Turkey and the US became more strained following Turkey’s refusal to release a jailed US pastor.
The diplomatic spat spilled over into the economy, as US President Donald Trump reacted by doubling tariffs on steel and aluminum imported into Turkey. A decree on Thursday from Erdo?an has since banned the purchase of foreign currency.