The Central Bank of Turkey is expected to announce today that interest rates will remain at 8.25%. The central bank
The Central Bank of Turkey is expected to announce today that interest rates will remain at 8.25%.
The central bank has gradually lowered rates from 20% last year to the current 8.25% in order to prevent runaway devaluation of the lira as Ankara spends billions of dollars of foreign reserves to stabilise the economy. Interest rates will stay at this level until 2021, while Ankara will begin to issue lira-denominated short and medium-term government debt to maintain the currency’s stability and liquidity without having to expend more foreign reserves.
The Turkish economy has fared better than other emerging economies and is projected to shrink by only 4% in 2020. Data from recent months suggested that a weakened lira boosted Turkish exports and softened Ankara’s pandemic-related economic fallout. With current inflation levels, Turkish borrowing costs are already below 0%, and Ankara is betting that policy rates maintaining liquidity and a competitive lira will allow the Turkish economy to grow significantly after the pandemic on the back of exports and tourism. If Ankara is unable to meet these growth expectations, it is likely that capital and liquidity controls will be implemented to prevent higher inflation due to runaway devaluation of the lira.
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