The new economic team appointed by Turkish President Recep Tayyip Erdogan has taken a more realistic approach to communicating with the markets. They have conceded that inflation is likely to be as high as 65% by the end of this year, and they expect 33% by the end of next year. The team is also planning to cool the economy by squeezing growth to combat inflation.
The government has revised its economic targets for the next three years, and Erdogan has said that they will lower inflation to single digits with the support of monetary tightening. However, it is unclear how much his words mean, as he has previously said that he is opposed to raising interest rates.
Analysts are concerned that Erdogan could lose patience with the new economic team if inflation remains high for an extended period. They are also concerned about the risk of second-round effects, such as wage settlements.
The Turkish lira has soared to a record high against the US dollar this year, while the BIST 100 index has been one of the best-performing indices in the market. However, the challenge for the BIST 100 index is that the Central Bank of the Republic of Turkey (CBRT) has become relatively aggressive recently. It has hiked rates to 30% as it battles runaway inflation. The other risk for the Borsa Istanbul stocks is that the government has implemented currency control measures in a bid to save the crashing Turkish lira.
Erdogan’s U-Turn on Interest Rates: A Welcome Sign, but Will It Last?
The recent U-turn on interest rates by the Turkish government is a welcome sign that it is finally taking the threat of inflation seriously. However, it is important to note that Erdogan has a history of going back on his word, and it is therefore unclear whether he will stick to this new policy over the long term.
If he does, then it is likely that the Turkish economy will experience a period of slower growth. However, this will be necessary to bring inflation under control. In the meantime, the Turkish lira is likely to remain volatile, and the BIST 100 index could experience a pullback.
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