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Turkey’s 10-year government bond yield climbed to 28.8% in mid-August, marking its highest level since at least 2020. This rise comes in response to Turkey’s pivot towards more conventional monetary policy, following a period of unorthodox, ultra-loose monetary policy that characterized much of Q2 2023. The bond yield surge reflects market reactions to the central bank’s current stance, which aims to stabilize the country’s economy amidst inflationary pressures and currency fluctuations.
The central bank has maintained its key interest rate at a 2002-high of 50% for the fifth consecutive meeting. This rate is 41.5 percentage points above the terminal low from last year, indicating a remarkable tightening of monetary policy in response to persistent inflationary pressures. The move to keep rates high signals the central bank’s commitment to curbing inflation, which has been a major concern for the Turkish economy.
In July, Turkey’s inflation rate significantly eased, falling to 61.8% from 71.6% in June. This decline suggests that inflation may have reached its peak, as anticipated by economic analysts. However, the central bank remains vigilant, as there are ongoing concerns about the oversupply of the Turkish lira. The high interest rates, combined with renewed foreign investment, have contributed to an excess of lira in the market, which could potentially undermine the tight monetary policy stance.
To tackle this problem, the central bank is exploring strategies to absorb the excess liquidity in the market. These measures may include borrowing through the main clearing house and conducting lira-buying auctions. Such actions would help to stabilize the currency and reinforce the central bank’s monetary policy objectives.
Despite the apparent success in curbing inflation, the challenges facing Turkey’s economy are far from over. The central bank’s ability to manage the lira’s value and control inflation will be crucial in the coming months. The ongoing high bond yields reflect the market’s cautious outlook on Turkey’s economic stability and the effectiveness of its monetary policy.