Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

The Limits of Turkey's Interest Rate Hike

Interest-Rates / Turkey Jan 30, 2014 - 06:35 PM GMT

By: STRATFOR

Interest-Rates

Summary

With a dramatic hike in Turkey's overnight lending rate from 7.75 to 12.5 percent announced on Jan. 28, Turkish Central Bank Gov. Erdem Basci followed through on his earlier promise to use interest rates as a weapon to defend Turkey's currency, the lira. While the hike is a bolder-than-expected move designed to jolt investor interest, Basci is still, in effect, using a sword to fight off a barrage of artillery as a wrenching political crisis continues to erode investor confidence.


Analysis

Turkey has been desperately trying to stem the plunge of the lira, which has declined about 10 percent against the U.S. dollar over the past year. Like several other once-celebrated emerging economies, Turkey has seen a rapid outflow of short-term portfolio investment that Ankara had been heavily relying on to help cover its burgeoning current account deficit, totaling $60.8 billion, or roughly 7 percent of gross domestic product, for January to November 2013.

The capital flight has been driven in part by the U.S. Federal Reserve's withdrawal of stimulus measures, which has limited Turkey's access to cheap liquidity. With the Federal Reserve's Jan. 29 announcement that it would again reduce its monetary stimulus, Turkey is now applying all of its tools to stabilize the lira, even with the knowledge that the move is unlikely to have a lasting impact. This is because Turkey's financial troubles have been greatly exacerbated by a deep-rooted power struggle that is only going to intensify in the lead-up to local elections in March, presidential elections in August and parliamentary elections in 2015.

Foreign investors have been chiding Turkey's government for its unorthodox method of defending the currency, until now consisting mostly of foreign exchange auctions and withdrawals from the central bank in order to avoid raising interest rates, a move the government feared would limit growth. But Turkey's government has also been operating under heavy political constraints, resulting in swings in both its economic and political behavior. In this particularly volatile election season, Turkish Prime Minister Recep Tayyip Erdogan has been loathe to turn to measures that would slow economic growth and thus undermine his party's standing.

Turkish Lira to U.S. Dollar Exchange Rate


In the days leading up to the central bank decision to raise the interest rate, Erdogan remained publicly defiant, urging the central bank to stand strong and not give in to the so-called interest rate lobby, which he charged with trying to undermine Turkey's growth. When nationwide protests spun up from a Gezi Park demonstration in 2013, Erdogan declared war against the same nebulous interest rate lobby, which he accused of fanning the demonstrations out of greed and desire to topple the government.

Erdogan's distrust of high interest rates stems from a much deeper political paranoia. Perhaps the defining moment of Erdogan's political career was the 1997 military coup that ousted the Welfare Party, the predecessor of Erdogan's Justice and Development Party, from power. Erdogan, who was mayor of Istanbul at the time, was sentenced to prison for 10 months for reciting a poem that criticized the army. This was also a very volatile period for the Turkish economy, with the country facing chronic double-digit inflation and staggeringly high interest rates on foreign loans to cover a soaring budget deficit. Members of Turkey's traditional secular elite who ran the country's largest banks were accused of being debt profiteers during the crisis, making Erdogan all the more determined to write off debt, contain inflation and raise a new economic power elite when he came into power in 2002.

In vilifying high interest rates against the prevailing economic consensus on how to deal with the problem, Erdogan is (rationally or not) trying to warn against a repeat of the past that would empower his old adversaries. The crop of economic elites that Erdogan worked hard to empower over the past decade now find themselves targeted by a cutthroat corruption probe launched by his own party's former allies, jeopardizing years of work and with it, Erdogan's legacy. The Gulen movement, whose powerful network in Turkey's judiciary, police forces, media and government was once instrumental in bringing the Justice and Development Party to power, is intent on seeing Erdogan cut down to size in upcoming elections.

Exacerbating Erdogan's fears is a concern that the Gulenists will quietly forge an alliance of convenience with Turkey's old secular elite to weaken and fracture the ruling party. Even as the central bank is straying from Erdogan's line to pursue a more conventional monetary policy, this is a power struggle that will only intensify in the coming months and thus continue to undermine investor confidence in Turkey.

"The Limits of Turkey's Interest Rate Hike is republished with permission of Stratfor."

This analysis was just a fraction of what our Members enjoy, Click Here to start your Free Membership Trial Today! "This report is republished with permission of STRATFOR"

© Copyright 2014 Stratfor. All rights reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.

STRATFOR Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules