Currency tumult hits Turkey’s credit-driven revival (Al Monitor, August 10, 2020)
Pumped with cheap and abundant credit since early June, Turkey’s economy has warmed up after…
Following a January increase of 7.5% in US year-on-year consumer prices, the Federal Reserve is expected to raise interest rates in its March meeting in a bid to rein in the inflation. Although how aggressively the US central bank will hike the rates remains unknown, markets expect a hike of at least 25 basis points (0.25%).
The move, which will boost the US dollar, raises the specter of foreign funds flowing to the American markets. For emerging economies, particularly for Turkey, expected rate hikes to rein the inflation are bad news but hardly unanticipated.
Most emerging economies have already taken several steps to weather the economic impact of the Fed’s potential rate hikes, including interest rate hikes of their own to safeguard the value of their currencies and prevent the flight of foreign funds.
But Turkey’s Central Bank did the exact opposite by cutting the interest rates 500 basis points since September under political pressure, triggering an outflow of foreign funds — a process likely to speed up by the Fed’s rate hikes. Turkey’s President Recep Tayyip Erdogan defends an unorthodox view that high interest rates cause high inflation.
Finance and Treasury Minister Nureddin Nebati’s trip to London last week to pitch Turkey’s unorthodox economic model appears to be fruitless so far. Indeed, a few days after Nebati’s return, credit rating agency Fitch downgraded Turkey’s sovereign debt rating further into junk territory citing increasing financial vulnerabilities. The country’s current account deficit reached $6.6 billion in November-December, with the annual current account deficit standing at some $15 billion. The deficit is expected to widen in January and will remain as a problem for the country’s import-reliant economy in 2022.
The US Federal Reserve aims to lower the inflation that was fueled by supply bottlenecks stemming from the pandemic by gradually increasing interest rates. Markets expect the total rate hikes will reach 100 basis points by July.