What are the chances of Turkey’s Central Bank to drop interest rates in close future?

August 16, 2024 BTT

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Turkey has been strong need of foreign currency for a long while due to several reasons, the negative balance in foreign trade to be in the first place. The fact that the economy of the country and the industry in particular is heavily based on imports has certainly had an undesired and negative impact on this picture, as well.

While this was the situation, the finance administration has designed and gave way to new applications to make life easy for foreign capital (currency) to come to Turkey. Among them “carry trade” was widely preferred and used by foreign capital holders who fully enjoyed making huge amounts of revenues (profit) using this practice.

The administration has tried to keep the interest rates in TL high enough to bring sufficient revenue while putting pressure on dollar TL rate so as to make it possible for carry trade investors to buy dollars back at cheap rates when leaving the country with good enough profits made over TL investments. This way Turkey has been able to attract substantial money (foreign currency) from abroad even if temporarily to support its finances.

WHAT HAPPENS IF CENTRAL BANK DROPS INTEREST RATES SUBSTANTIALLY IN SHORT TERM?

Now comes the question though “What happens if the Central Bank drops interest rates substantially”. The answer to this question is provided by a prominent expert in this area.

“Will TL interest rates fall in the short term? If they do, will the dollar gain value against TL?“

I believe that TL interest rates will not fall until at least January 2025. So what happens if they fall?

If they fall, the Minister of Treasury, Finance and Treasury Mehmet Şimşek may even have to resign. If the Central Bank interest rate falls to a figure like 25% in September, then all those who have come to Turkey for carry trade will try to take their dollars and escape from this country.

However, many might not be able to do so as their money will be sort of imprisoned in Turkey. Because in such a scenario there will be great demand for dollar in the market meaning they will have great difficulty finding foreign currency to buy before leaving.

So this risky and undesired situation could be a scary scenario for those practicing carry trade in Turkey in case of a sharp fall in interest rates to come from Central Bank.