Experts express concern Turkey could see 20 percent inflation in September

Following the swift rise in dollar against Turkish Lira, Turkey’s administration took new measures with the final target to put out the fire in economy and although the steps taken have managed to pull the dollar/lira rate below 6, they have has simultaneously caused a sharp increase in interest rates. To be more interesting the Central Bank did not bother to intervene in interest rates as this happened. This being the case, some economists comment the upward trend in the currency would be reflected in inflation, and a trend towards 20 percent in inflation could be seen in September.

The experts comment that the steps taken to lower the exchange dollar/lira rate below level have been successful (so far) but led to a sharp rise in interest rates, however. Failure on the other hand, by the Central Bank to intervene in policy rates on time has had a negative impact on the investor’s perception of Turkey and while steps to pull down the rate caused market interest rates to hit the top. Two-year interest rate reached 30 percent in which case this rise in interest rates is expected to increase bank costs eventually reflecting on loan interest rates.

After the swap measures by the Central Bank, the exchange rate fell to 5.75 percent, while bond interest rates rose to 28 percent. According to experts, not only swap transactions but stock exits also had a considerable impact on increase in interest rates. Among the factors that would cause this rise, rising inflation and unemployment expectations, deterioration in budget and current account balance could be easily included.

In case the increase in interest rates raise risk premiums it would be more difficult for borrowers to borrow from abroad due to increased interest rates. Accordingly, borrowing loans with high interest rates would lead to increased interest expenses and companies would face deterioration of balance sheets.

Experts comment that it is not yet known what level exchange rate would be stabilized at after the exchange rate shock and that this is one of the most important factors of the rise in interest rates. They also forecast that the rise in the currencies will be reflected in the inflation and add that a trend towards 20 percent in inflation to be seen in September, would not be a remote possibility.