The Turkish Central Bank Maintains Interest Rates Unchanged
The main interest rate in Turkey remained unchanged after the Turkish Central Bank extended its interest rate pause for the fourth consecutive month and promised to continue its tough approach towards inflation until it sees evidence of a sustainable decrease in the monthly price growth. During its meeting on July 23, the bank’s monetary policy committee, led by the institution’s president Fatih Karahan, kept the one-week repo rate at 50% annually, in line with the forecasts of all analysts surveyed by Bloomberg agency.
Bankers Warn of Future Inflationary Pressures
Bankers have given indications for their future firm inflationary approach, warning that the monthly inflation rate “will temporarily increase” in July. “In addition to the high level and sustainability of inflation in the services sector, inflation expectations, geopolitical risks, and food prices maintain high inflationary pressures,” bankers stated in their official statement.
The rise in consumer prices in Turkey has cooled in June for the first time in eight months, but remains over 14 times higher than the target set by the central bank.
The Central Bank’s Strategy to Combat Inflation
The Central Bank has announced its plan to raise interest rates by 5% annually. Governor Smith is adamant about dispelling rumors of premature rate cuts, stating that he wants to ensure that inflation targets for the coming years are met before discussing any reductions in interest rates. The institution’s chairman explains that only increases in electricity prices and taxes will add 1.5% to the monthly inflation rate in July. These statements have led some analysts to revise their forecasts, with some now predicting a 4% price increase for the year.
The Impact of Inflation on the Turkish Economy
Bankers acknowledge that inflation may temporarily rise, but this will not have a significant impact on the overall downward trend. They predict that the annual inflation rate will drop below the current level of just under 7.2 percent. Ankara aims to reduce the annual inflation rate to 14% by the end of 2025.
By keeping the key interest rate high, monetary strategists are expected to continue efforts to reduce excess liquidity in the Turkish lira through alternative measures. This bloated liquidity puts downward pressure on interest rates.
The Impact of Deposit Interest Rates on Short-Term Financing
When it comes to managing a bank’s financial strategy, balancing deposit interest rates with short-term financing costs is crucial. These two factors can have opposite effects on the bank’s overall profitability.
Recently, Moody’s Investors Service upgraded Turkey’s credit rating to “B1”, the first increase in the past 11 years. Credit experts justified this decision by citing the higher reliability of the central bank’s monetary policy. Despite this upgrade, Turkey’s rating is still four levels below investment grade, indicating that there is room for improvement in the country’s financial stability.
Analysis of Turkish Economy
According to analysts from “Morgan Stanley”, the increase in the credit position of our southern neighbor could attract “higher quality” foreign investments in Turkish assets. They also note that achieving a more sustainable trust in the Turkish lira will require a significant and sustained slowdown in inflation.