- Interest rates expected to remain high for now in order to keep Turkish Lira stable
- Early cut in interest rate could see carry trade unwind adding more volatility to Lira
- Foreign investor inflows have kept costs of Government borrowing down
The Turkish Central Bank has announced interest rates will remain at 50% for the ninth month in a row. Mert Kisacik, Turkey expert at KNG Securities, the fixed income investment bank, expects interest rates to hold at 50% until at least February next year.
Interest rates rose sharply following the 2023 presidential election to 50% from 8.5% as the Turkish government adopted orthodox monetary policy.
Mert Kisacik, Fixed Income Sales at KNG Securities, says: “After a tough few years of high inflation, there are clearer signs that the stricter monetary policy is paying off.”
“However, inflation is still too high and is forecast to fall relatively slowly – so the market wouldn’t be comfortable with too precipitous a cut in rates.”
High interest rates and a strong Lira have made Turkey attractive for carry trade
A cut in interest rates without taming inflation could weaken the Lira especially as high interest rates and a stable currency have attracted foreign investors into Turkey through a “carry trade”.
A premature cut in rates followed by an unwinding in the carry trade could see the Lira return to a period of volatility, something the Central Bank would want to avoid. Mert explains that inflows from foreign investors have helped push down borrowing costs for the Turkish Government.
A carry trade is when an investor borrows at a low interest rate to invest in higher yield markets.
