It is well known that Mr Erdogan is against rising interest rates. He has been very explicit about this. In fact in one speech he has threatened to ”choke’‘ speculators.
However he cannot stand against market forces.
In the last month, the central bank has already increased bank interest rates, as I forecast. I also said that this is not the end of rate increases.
Yesterday’s bond auctions confirm my predictions. The Treasury held auctions for state bonds and had to pay more than 9% interest to attract buyers.
July retail sales in the US were announced to be up 0.2% and this confirmation of an improving economy pushed up bond yields in the US. As this sucked in overseas dollars, the Turkish lira weakened against the dollar.
The domestic banks in Turkey are getting less keen to hold government bonds every month. As their appetite diminishes, the state has to offer higher interest rates to induce them to bid for its bonds.
Banks will look to depositors for funding and offer them similar rates.
The pressures generated are far from played out. I predict that there will be more interest rate increases this year and I would not be surprised to see rates above 10% by the end of the year.
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