Erdogan to Give Rate Hikes a Chance

by on January 30, 2014 5:50 pm BST

The boisterous Turkish Prime Minister Recep Tayyip Erdogan said he would give the interest rate hikes a change before changing course to a contingency plan. The rate increase in Turkey’s “main” rates strengthened the lira, but it has weakened since than as the dollar continues to strengthen.

Erdogan will be patient only as the lira and Turkish equity markets start to increase and the eventually decrease in interest rates. The central bank was able to gain back a little credibility, but monetary policy is still extremely political in Turkey with the central bank trying to separate from that. The prime minister said the government could announce a plan B or C without giving any details besides saying interest rates “aren’t the only instrument.”

The interest rate hikes are said to be a measure to stop short-term capital outflows and ease the lira’s decline, but Turkey’s economy has been a struggle. These tightening monetary steps could coke off any advances in growth expansion. With only two months from elections Erdogan has his hands full if the decline in the lira and economy continue, not including the large political scandal for corruption.

As expected, the USDTRY strengthened and retested 2.30, which was confirmed as resistance with another rejection. The lira was able to gain some ground, currently trading at 2.2466.