What’s going on here?
Turkish overnight interest rates recently fell from 53% to around 47.4%, driven by a rise in the central bank’s foreign exchange reserves.
What does this mean?
Turkey’s central bank saw its reserves swell by $9 billion last week due to a surge in foreign investor demand, boosting liquidity and causing overnight rates to dip. Despite this, the central bank is likely to keep the policy rate at 50% in Thursday’s meeting. A Reuters poll indicates the rate will stay unchanged until at least November, with potential easing on the horizon. Meanwhile, some banks are cutting long-term loan and deposit rates in anticipation of falling inflation, which decreased to just below 52% in August from 75% in May.
Why should I care?
For markets: Banks adjust to new realities.
Both state and private banks are responding to changing economic signals. Ziraat Bank has cut its long-term housing loan rates to 2.79% monthly from 3.09%, and some private banks have reduced their one-year and longer-term deposit rates to 30-35% from about 40-45% in July. Investors should watch for new central bank measures to manage the increased lira liquidity, which has now touched 310 billion lira.
The bigger picture: Economic outlook takes center stage.
Analysts expect the central bank to provide clearer guidance on its monetary policy during the upcoming meeting. This could include modifying or abandoning previous tightening commitments. The government’s forecast sees inflation dropping to 17.5% by the end of 2025, fueled by recent monetary tightening efforts. The central bank’s approach will be crucial in navigating these economic waters, influencing the broader economic stability and growth trajectory of Turkey.
