🏦 Turkish Central Bank Pauses Hiking Cycle at 45% Interest Rate

🐺 Hi pack-mates,

This is Howling Markets, the newsletter that will never block you from accessing the most interesting news of the financial markets!

Today we will be covering:

• Case Study: What Happened To the Turkish Lira? 💵

• BitForex Stops Withdrawals and Customer Support! 🚫

• Turkish Central Bank Pauses Hiking at 45% Interest Rate 🏦

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

Case Study: What Happened To the Turkish Lira?

Over the past years, many countries around the world have been battling inflation. In most cases, inflation was caused by the surge of government aid during the post-pandemic period to help households during these tough times. However, in other cases, it was a preexisting issue, such as in Turkey. 

The story of Turkey is an extremely interesting case study that provides a textbook example of why inflation is dangerous and how it can be caused.

Everything started during the first years after the great financial crisis, when Turkey presented itself as an emerging economy full of opportunities. Thanks to its characteristics, many investors were attracted to it and the country started a period of explosive growth, reaching an average of +6.1% real GDP per year between 1999 and 2022.

However, this stunning growth was in part due to the speculation on this emerging economy, but also fueled by the extremely low interest rates that were imposed by the Central Bank of the Republic of Turkey (CBRT), at the expense of any other macroeconomic variable.

What I mean by this is that the CBRT allowed rates to remain low to inflate GDP growth, but by doing so they let the country “run too hot”, achieving higher than sustainable levels of production and investment, causing a very high level of inflation.

The reason behind this central bank behavior can be explained by two main factors. First of all, in Turkey lending money at an interest rate is deemed sinful from a religious standpoint, so the government and central bank were reluctant to do so. Additionally, in Turkey the central bank is not independent, so even when the CB wanted to do so, it was stopped by the government.

These dynamics caused inflation to reach +85% per year in 2022 before slightly colling down to +65% per year during the first reading of 2024. This strong inflation caused investors and consumers to dump the Turkish lira and to start using foreign currencies, inducing a violent devaluation of the domestic currency.

In a matter of four years, the exchange rate between the Turkish lira and the US dollar skyrocketed from 5.7 liras per dollar to over 31 liras per dollar.

BitForex Panic: the Exchange Stops Withdrawals and Customer Support!

Another worrying factor impacts the cryptocurrency industry!

BitForex, the “world’s leading one-stop digital asset lending platform” as triumphantly expressed on their website’s homepage, has shut down its services without giving any notice.

On Friday, the 23^rd of February, BitForex halted any customer withdrawals without giving any notice, neither before nor after the fact. Additionally, the company has also stopped its customer support services including every form of communication both through their website, email and any social media.

The only known fact about this occurrence is the communication an insider made on Friday who stated that over $56 million dollars had been withdrawn from three BitForex accounts on Thursday, the day prior to the halt. 

Today, also the company’s website has been shut down, blocking clients from accessing their BitForex account showing this error message below. How do you think that this situation will resolve?

Today’s Howling Question

And now, it is time for our howling question!

Knowing that the USD/TRY exchange rate is currently trading at around 31.11 and that the EUR/USD is around 1.085, can you guess which is the exchange rate between the euro and Turkish lira?

1. 22.45

2. 27.67

3. 30.65

4. 33.80

5. 37.89

Note: TRY is the forex ticker for the Turkish lira, so the exchange rate between the USD and the Turkish lira is expressed as USD/TRY, whereas the one between euro and Turkish lira is EUR/TRY.

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Turkish Central Bank Pauses Hiking Cycle at 45% Interest Rate

As we have briefly mentioned before, the Turkish central bank has had some serious impediments that stopped it from successfully performing its function. However, last February the CBTR had a change of office and Fatih Karahan took office as the new central bank governor.

It turned out to be a great change for Turkey as this new governor had a completely different view about policy rates compared to its predecessor and he decided to start one of the most aggressive hiking cycles of modern history.

The monetary policy action began in June and in less than 8 months it increased the policy rates from 8% to 45% with the intention of putting a stop to the skyrocketing inflation and the investors’ run from the country. By doing so, the policymakers also hoped to halt the devaluation of the Turkish lira and to encourage domestic investments.

Last Thursday the CBRT announced that they have reached the peak in their hiking cycle and, unless adverse future conditions, they expect to hold rates constant until they will a significant inflation cooldown to their 5% target level.

Were you aware that some countries around the world are currently operating with a policy rate almost 10 times higher than the US?

Equity and Debt Markets Update

And now, our daily markets update!

After Friday’s trading session that pointed towards a short term reversal, Monday followed up by continuing the downward trend. The S&P 500 closed the day -0.38%.

However, a slight pullback must be expected before any major economic data release. On Thursday the US will be publishing personal income, personal spending, and core PCE monthly changes, which are all great indicators of how inflation is developing in the US.

On the other hand, US yields rose on Monday due to the anticipation of another important economic news: the US bond auction which is set to take place on Friday. The treasury has decided to hold its largest debt issuance ever, which has caused debt securities’ prices to fall and yields to increase.

On Monday, the 10 year US government bond yield rose +0.73%, remaining above the key 4,230% level which has served as a support over the past weeks.

Answer

The correct answer is 4) 33.80

Ideally, perfect forex markets should function without allowing any triangular arbitrage, meaning that the exchange rates between three currencies should be concatenated such that they do not offer any discrepancies between the three.

This means that theoretically USD/TRY times EUR/USD should equal EUR/TRY. However, due to approximations and rounding, this equation does not always perfectly hold, but it should give you a close enough answer!

Howl-Worthy Memes 😂

🐺 See you next time!

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