Russian tourists to Europe fell dramatically over the summer, but increased in several other destinations, including Turkey (here).
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Turkey’s central bank surprised markets again on Thursday with its decision to cut key interest rates despite domestic inflation surging above 80%.
The country’s monetary policymakers opted for a 100 basis point rate cut, raising the main one-week repo rate to 12% from 13%. Turkey’s inflation rate in August he hit 80.2%, rising for the 15th straight month and hitting a 24-year high.
Turkey also cut interest rates by 100 basis points in August and gradually cut interest rates by 500 basis points at the end of 2021, triggering a currency crisis.
A statement from the central bank said it “assessed the latest policy level to be appropriate under the current outlook,” according to Reuters. Cuts are necessary as growth and demand continue to slow. He also cited “escalating geopolitical risks.”
Markets should expect “a disinflationary process to begin” against the backdrop of the measures taken, Reuters reported.
The policy direction has long surprised investors and economists. They say their refusal to tighten policy is a result of political pressure from Turkish President Recep Tayyip Erdogan. to keep inflation down.
Amid Turkey’s ballooning trade and current account deficits and declining foreign exchange reserves, months of campaigns to continuously cut interest rates have instead forced Turkey’s currency, the lira, into a multi-year tailspin. I’m in.
lira lost more than 27% of its value dollar Year-to-date, 80% over the last five years. Following the announcement of the bank’s interest rate decision, the currency dropped a quarter percentage point to trade at a record low of $18.379 to the dollar.
Many economists predict further lira depreciation. London-based Capital Economics sees a fall to 24 against the dollar by March 2023.
“The room for further easing is becoming increasingly limited as this puts pressure on the lira and real interest rates,” Liam Peach, senior emerging markets economist at the firm, told CNBC. “Turkey has a huge current account deficit that has become dependent on foreign capital inflows to fund it. Turkey’s foreign exchange reserves are so low that the central bank is in no position to intervene,” he said. Stated.
Peach warned that at some point trust will likely be so low that these important inflows will dry up.
Erdogan, on the other hand, remains optimistic and predicts inflation will fall by the end of the year. “Inflation is not an insurmountable economic threat. I am an economist,” the president said in an interview on Tuesday. Erdogan is not an economist by training.